Sectoral Price Rigidity and Aggregate Dynamics
CIRPEE Working Paper 09-06
62 Pages Posted: 24 Jun 2009
Date Written: February 25, 2009
In this paper, we study the macroeconomic implications of sectoral heterogeneity and, in particular, heterogeneity in price setting, through the lens of a highly disaggregated multi-sector model. The model incorporates several realistic features and is estimated using a mix of aggregate and sectoral U.S. data. The frequencies of price changes implied by our estimates are remarkably consistent with those reported in micro-based studies, especially for non-sale prices. The model is used to study (i) the contribution of sectoral characteristics to the observed cross sectional heterogeneity in sectoral output and inflation responses to a monetary policy shock, (ii) the implications of sectoral price rigidity for aggregate output and inflation dynamics and for cost pass-through, and (iii) the role of sectoral shocks in explaining sectoral prices and quantities.
Keywords: multi-sector models, price stickiness, simulated method of moments, sectoral shocks, monetary policy
JEL Classification: E3, E4, E5
Suggested Citation: Suggested Citation