Working Paper: NBER ID: w12824
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: Sticky Prices; Monetary Policy; Disaggregated Data; Inflation; Macroeconomic Shocks
JEL Codes: C3; D2; E3; E4; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroeconomic shocks (F41) | sectoral inflation fluctuations (E31) |
| sector-specific factors (L52) | sectoral inflation fluctuations (E31) |
| sectoral inflation fluctuations (E31) | persistence (C41) |
| common macroeconomic components (E20) | persistence of sectoral inflation fluctuations (E31) |
| sector-specific shocks (F69) | changes in prices (E30) |
| macroeconomic shocks (F41) | changes in prices (E30) |
| monetary policy shocks (E39) | prices (P22) |
| volatile idiosyncratic shocks (E32) | reaction to monetary policy shocks (E39) |
| market power (L11) | dispersion in reaction of producer prices to monetary policy shocks (E39) |
| sector-specific shocks (F69) | movement of prices and quantities (E39) |