Does In‡ation Adjusts Faster to Aggregate Technology Shocks than to Monetary Policy Shocks LUIGI PACIELLO* Abstract This paper studies in‡ation adjustment speed to aggregate neutral technology shocks and to monetary policy shocks in a Bayesian VAR model. The two structural shocks are identi…ed through model-robust sign restrictions. Determining the speed of in‡ation adjustment to di¤erent types of shocks provides information on the ability of existing models of price setting to match price dynamics. This paper shows that, in the United States, in‡ation adjustment speed to aggregate technology shocks is substantially faster than to monetary policy shocks. This paper also shows that standard Calvo models of sticky prices are able to explain only part of the di¤erence in in‡ation persistence to technology and monetary policy shocks. JEL Classi…cation: E31, E4, C11, C3 Keywords: Bayesian VAR, price responsiveness, monetary policy shocks, technology shocks, sign restrictions

*

Email: [email protected]. Mailing address: Einaudi Institute for Economics and

Finance, Via dei Due Macelli, 73, 00187 Roma. I am grateful to Pierpaolo Benigno, Martin Eichenbaum, Francesco Lippi, Stefano Neri and Giorgio Primiceri for helpful suggestions and comments.

Does Inflation Adjusts Faster to Aggregate Technology ...

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