Working Paper: NBER ID: w25303
Authors: Ernesto Pastén; Raphael Schoenle; Michael Weber
Abstract: We study the transmission of monetary policy shocks in a model in which realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages, and derive conditions under which these heterogeneities generate large real effects. Empirically, heterogeneity in the frequency of price adjustment is the most important driver behind large real effects, whereas heterogeneity in input-output linkages contributes only marginally, with differences in consumption shares in between. Heterogeneity in price rigidity further is key in determining which sectors are the most important contributors to the transmission of monetary shocks, and is necessary but not sufficient to generate realistic output correlations. In the model and data, reducing the number of sectors decreases monetary non-neutrality with a similar impact response of inflation. Hence, the initial response of inflation to monetary shocks is not sufficient to discriminate across models and for the real effects of nominal shocks.
Keywords: Monetary Policy; Heterogeneous Production; Price Rigidity; Input-Output Linkages
JEL Codes: E20; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Heterogeneity in price rigidity (L11) | larger real effects of monetary policy shocks (E39) |
| Sectoral disaggregation (E16) | larger real effects of monetary policy shocks (E39) |
| Sectoral characteristics (price rigidity and sectoral size) (L11) | identity and importance of sectors in the transmission of monetary shocks (E44) |
| Heterogeneity in price rigidity (L11) | response of the ten most affected sectors (L52) |
| Homogeneous price stickiness (C54) | response of the smallest sectoral responses (D79) |