Structural Transformation, Services Deepening, and the Transmission of Monetary Policy

47 Pages Posted: 28 Jul 2016

Date Written: July 28, 2016

Abstract

Advanced economies are undergoing a structural transformation from manufacturing to services. We document that structural change comes with a process of services deepening: over time, both services and manufacturing become more intensive in service inputs. We argue that structural transformation and services deepening affect the transmission of monetary policy by increasing the relative importance of services, which have stickier prices than manufacturing. We study the implications of the U.S. sectoral reallocation with a New Keynesian model with two sectors connected by an input-output matrix, which varies endogenously over time. The rise of services dampens the responses of aggregate and sectoral inflation rates to a monetary policy shock. The changes in the responses of sectoral inflation rates are entirely driven by services deepening.

Keywords: New Keynesian model, intermediate inputs, input-output matrix

JEL Classification: E31, E43, E52, O41

Suggested Citation

Galesi, Alessandro and Rachedi, Omar, Structural Transformation, Services Deepening, and the Transmission of Monetary Policy (July 28, 2016). Banco de Espana Working Paper No. 1615, Available at SSRN: https://ssrn.com/abstract=2815343 or http://dx.doi.org/10.2139/ssrn.2815343

Alessandro Galesi (Contact Author)

idealista ( email )

Madrid, Madrid 28014
Spain

Omar Rachedi

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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