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  5. Large Shocks Travel Fast

Large Shocks Travel Fast

  • Alberto Cavallo
  • Francesco Lippi
  • Ken Miyahara
American Economic Review: Insights (Forthcoming)

Abstract

We document a sizeable increase in the frequency of price adjustments following the large energy shocks of 2022. We use a tractable New Keynesian model, calibrated to the pre-shock data, to interpret such a pattern. The calibration highlights the state-dependence of firms' decisions: prices are adjusted rapidly when markups are misaligned. In the model, a large cost shock triggers a swift increase in the frequency of price adjustments, causing a rapid pass-through from costs to prices. Time-dependent models, as the Calvo model, miss this frequency response, failing to capture the sudden inflation surge after a large shock.

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