Back to Basics: Sticky Prices in the Monetary Transmission Mechanism
24 Pages Posted: 14 Oct 2011
Date Written: September 1, 2011
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: Suggested Citation