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2006, No. 24
Posted 2006-10-02

The Price Puzzle: An Update and a Lesson

by Michael J. Dueker

Many empirical estimates of the relationship between the federal funds rate and inflation have suggested that a surprise interest rate hike is followed immediately by a sustained increase in the inflation rate—the so-called "price puzzle." The lesson policymakers seem to have learned is to avoid this puzzle in the first place by remaining active inflation fighters in order to preserve people’s beliefs in determinacy.