Price Rigidities and the Granular Origins of Aggregate Fluctuations
63 Pages Posted: 13 Oct 2017
Date Written: October 10, 2017
We study the aggregate implications of sectoral shocks in a multi-sector New Keynesian model featuring sectoral heterogeneity in price stickiness, sector size, and input-output linkages. We calibrate a 341 sector version of the model to the United States.
Both theoretically and empirically, sectoral heterogeneity in price rigidity:
(i) generates sizable GDP volatility from sectoral shocks,
(ii) amplifies both the “granular” and the “network” effects,
(iii) alters the identity and relative contributions of the most important sectors for aggregate fluctuations,
(iv) can change the sign of fluctuations,
(v) invalidates the Hulten (1978) Theorem, and
(vi) generates a “frictional” origin of aggregate fluctuations.
Keywords: input-output linkages, sticky prices, idiosyncratic shocks
JEL Classification: E31, E32, O40
Suggested Citation: Suggested Citation