Working Paper: CEPR ID: DP6101
Authors: Jean Boivin; Marc Giannoni; Ilian Mihov
Abstract: This paper disentangles fluctuations in disaggregated prices due to macroeconomic and sectoral conditions using a factor-augmented vector autoregression estimated on a large data set. On the basis of this estimation, we establish eight facts: (1) Macroeconomic shocks explain only about 15% of sectoral inflation fluctuations; (2) The persistence of sectoral inflation is driven by macroeconomic factors; (3) While disaggregated prices respond quickly to sector-specific shocks, their responses to aggregate shocks are small on impact and larger thereafter; (4) Most prices respond with a significant delay to identified monetary policy shocks, and show little evidence of a 'price puzzle'' contrary to existing studies based on traditional VARs; (5) Categories in which consumer prices fall the most following a monetary policy shock tend to be those in which quantities consumed fall the least; (6) The observed dispersion in the reaction of producer prices is relatively well explained by the degree of market power; (7) Prices in sectors with volatile idiosyncratic shocks react rapidly to aggregate monetary policy shocks; (8) The sector-specific components of prices and quantities move in opposite directions.
Keywords: Factor-augmented VAR; Monetary policy; Price stickiness
JEL Codes: C3; D2; E31; E4; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sector-specific factors (L52) | sectoral inflation rates (E31) |
| macroeconomic components (E20) | persistence of sectoral inflation fluctuations (E31) |
| sector-specific shocks (F69) | sectoral inflation fluctuations (E31) |
| macroeconomic shocks (F41) | persistent inflation effects (E31) |
| sector-specific shocks (F69) | immediate and permanent changes in prices (D41) |
| macroeconomic shocks (F41) | sluggish and persistent effects on prices (E30) |
| monetary policy shocks (E39) | delay in price response (G19) |
| idiosyncratic volatility (G19) | rapid price responsiveness to macroeconomic changes (E39) |