Back to Basics: Sticky Prices in the Monetary Transmission Mechanism

24 Pages Posted: 14 Oct 2011

See all articles by Nicolás de Roux

Nicolás de Roux

Universidad de los Andes - Department of Economics

Date Written: September 1, 2011

Abstract

I use the measures of frequency of price adjustment in Nakamura and Steinsson (2008) to show that stickier price industries have higher levels of output response to monetary policy shocks. Using a Vector Auto-regression model, I build different measures of response to a monetary policy shock of 14 US industries. These measures are shown to be related to the level of price rigidity. More precisely, I find that if firms within an industry change prices twice as often as firms in another industry, output deviation from trend in response to a negative shock of 25 basis points will be 69 percentage points smaller in the less sticky industry. This result is stronger when I account for measurement error in the level of response.

Keywords: monetary transmission mechanism, interest rate, sticky prices, financial

JEL Classification: E31, E40, E52

Suggested Citation

de Roux, Nicolás, Back to Basics: Sticky Prices in the Monetary Transmission Mechanism (September 1, 2011). Documento CEDE No. 2011-38, Available at SSRN: https://ssrn.com/abstract=1944191 or http://dx.doi.org/10.2139/ssrn.1944191

Nicolás De Roux (Contact Author)

Universidad de los Andes - Department of Economics ( email )

Carrera 1a No. 18A-10
Bogota, AA4976
Colombia

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