Sectoral Heterogeneity in Nominal Price Rigidity and the Origin of Aggregate Fluctuations
57 Pages Posted: 20 Aug 2017 Last revised: 8 Dec 2021
Date Written: December 7, 2021
We derive conditions under which heterogeneity in nominal price rigidity amplifies the aggregate fluctuations from idiosyncratic shocks and demonstrate its quantitative implications: (1) GDP volatility from sectoral productivity shocks doubles when nominal price rigidity is heterogeneous rather than homogeneous; (2) sectoral productivity shocks can jointly rationalize the volatility of sectoral prices, aggregate prices, and GDP, unlike aggregate productivity shocks; (3) heterogeneity in nominal rigidity changes the sectors from which aggregate fluctuations originate. We also discuss implications for aggregate price dynamics and the role of alternative monetary policy rules.
Keywords: Input-output linkages, nominal price rigidity, idiosyncratic shocks
JEL Classification: E31, E32, O40
Suggested Citation: Suggested Citation