An Alternative Solving of The Price Puzzle in The Eurozone

Abstract

This article aims to readdress the price puzzle in Eurozone after the 2008 crisis and propose a new solution with the help of an augmented model. By adding commodity prices and federal funds rates to the classical three-variable VAR model (policy rate, price level, output), the price puzzle phenomenon in the euro area is examined. The findings are that commodity prices, which are often used as a solution to the price puzzle in the literature, are not sufficient to solve the puzzle alone after the 2008 crisis. The assumption that the ECB takes into account the monetary policy decisions of the FED while forming its monetary policy has been accepted and the Federal Funds Rate have been included in the model to solve the price puzzle in the Eurozone. When the results obtained from the augmented new model are examined, it is seen that the monetary policies of the FED have largely eliminated the price puzzles in the Eurozone. In addition, the proposed new model rationalizes the response of the output variable to monetary policy shocks. Unlike other studies in the literature, this study focuses directly on the Eurozone economy in the post-2008 crisis period and especially takes into account the increasing globalization trend in this period.

Keywords

• Keywords: Price Puzzle
• Transmission Mechanism
• Monetary Policy
• Eurozone

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