NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Are State and Time Dependent Models Really Different?

Fernando E. Alvarez, Francesco Lippi, Juan Passadore

NBER Working Paper No. 22361
Issued in June 2016
NBER Program(s):International Finance and Macroeconomics, Monetary Economics

Yes, but only for large monetary shocks. In particular, we show that in a broad class of models where shocks have continuous paths, the propagation of a monetary impulse is independent of the nature of the sticky price friction when shocks are small. The propagation of large shocks instead depends on the nature of the friction: the impulse response of inflation to monetary shocks is independent of the shock size in time-dependent models, while it is non-linear in state-dependent models. We use data on exchange rate devaluations and inflation for a panel of countries over 1974-2014 to test for the presence of state dependent decision rules. We present some evidence of a non-linear effect of exchange rate changes on prices in a sample of flexible-exchange rate countries with low inflation. We discuss the dimensions in which this finding is robust and the ones in which it is not.

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Document Object Identifier (DOI): 10.3386/w22361

Published: Are State- and Time-Dependent Models Really Different?, Fernando Alvarez, Francesco Lippi, Juan Passadore. in NBER Macroeconomics Annual 2016, Volume 31, Eichenbaum and Parker. 2017

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