Title : Non-linearities, state-dependent prices and the transmission mechanism of monetary policy
A sticky price theory of the transmission mechanism of monetary policy shocks based on state-dependent pricing yields two testable implications, that do not hold in time-dependent models. First, large monetary policy shocks should yield proportionally larger initial responses of the price level. Second, in a high trend ination regime, prices should be more exible, so that the response of the price level to monetary policy shocks should be larger and the real effects smaller. Our analysis provides evidence in favour of these non-linear effects in the response of the price level in aggregate U.S. data, supporting state-dependent pricing as an important feature of the sticky price theory of the transmission mechanism of monetary policy shocks.