Discussion paper

DP18413 Large shocks travel fast

We leverage the inflation upswing of 2022 and various granular data sets to identify robust price setting patterns following a large supply shock. We show that the frequency of price changes increases dramatically after a large shock. We setup a parsimonious New Keynesian model and calibrate it to fit the steady state data before the shock. The model features a significant component of state-dependent decisions, implying that large cost shocks incite firms to react more swiftly than usual, resulting in a rapid pass- through to prices—large shocks travel fast. Understanding this feature is crucial for interpreting recent inflation dynamics.


Cavallo, A, F Lippi and K Miyahara (2023), ‘DP18413 Large shocks travel fast‘, CEPR Discussion Paper No. 18413. CEPR Press, Paris & London. https://cepr.org/publications/dp18413