What Is the Role and Costs of Administered Prices? Evidence from Monetary Policy Responses to Positive Inflation Shocks

Abstract

Evidence from counterfactual analysis reveals that administered prices amplify the reaction of repo rate to positive inflation shocks. In the absence of administered price inflation channel, the repo rate tightening to positive inflation shocks would be much lower. This indicates that the monetary policy response to positive inflation shocks is another channel through which administered prices pose social costs and above the initial direct impact on the standard of living. Thus lowering the proportion of administered price in the CPI basket coupled with administered price inflation that grows at or below 4% is beneficial not only to lowering the cost of living but containing costs associated with contractionary monetary policy responses to positive inflation shocks.