Heterogeneous Price Rigidities and Monetary Policy

60 Pages Posted: 13 Jun 2018 Last revised: 20 Nov 2018

See all articles by Christopher Clayton

Christopher Clayton

Yale School of Management

Xavier Jaravel

London School of Economics & Political Science (LSE) - Department of Economics

Andreas Schaab

Columbia Business School

Date Written: August 6, 2018

Abstract

This paper investigates the implications of heterogeneous price rigidities across sectors for the distributional and aggregate effects of monetary policy. First, we identify and characterize analytically a new set of earnings and expenditure channels of monetary policy that emerge in the presence of sectoral heterogeneity. Second, we establish empirically that (i) prices are more rigid in sectors selling to college-educated households, (ii) prices are more rigid in sectors employing college-educated households, and (iii) sectors that employ college-educated households also sell more to these households. These new facts suggest that monetary policy stabilizes sectors that matter relatively more for college-educated households, due to an expenditure channel (from (i)), an earnings channel (from (ii)), and their amplification by feedback loops (from (iii)). Finally, we develop a multi-sector incomplete-markets Heterogeneous Agent New Keynesian model, in which households of different education levels work and consume in different sectors. We quantify the aggregate and distributional effects from heterogeneous price rigidities using this model. In the baseline calibration, we find that the consumption of college-educated households is 22% more sensitive to monetary policy shocks as that of non-college households, while the aggregate real effect of monetary policy is 5% stronger than with homogeneous price rigidities.

Suggested Citation

Clayton, Christopher and Jaravel, Xavier and Schaab, Andreas, Heterogeneous Price Rigidities and Monetary Policy (August 6, 2018). Available at SSRN: https://ssrn.com/abstract=3186438 or http://dx.doi.org/10.2139/ssrn.3186438

Christopher Clayton

Yale School of Management ( email )

Cambridge, MA
United States

Xavier Jaravel (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
7456842728 (Phone)
NW12AR (Fax)

Andreas Schaab

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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