The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy
75 Pages Posted: 22 Nov 2018
Date Written: November 21, 2018
We study the transmission of monetary policy shocks in a model in which realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages, and derive conditions under which these heterogeneities generate large real eﬀects. Empirically, heterogeneity in the frequency of price adjustment is the most important driver behind large real eﬀects, whereas heterogeneity in input-output linkages contributes only marginally, with diﬀerences in consumption shares in between. Heterogeneity in price rigidity further is key in determining which sectors are the most important contributors to the transmission of monetary shocks, and is necessary but not suﬃcient to generate realistic output correlations. In the model and data, reducing the number of sectors decreases monetary non-neutrality with a similar impact response of inﬂation. Hence, the initial response of inﬂation to monetary shocks is not suﬃcient to discriminate across models and for the real eﬀects of nominal shocks.
Keywords: Input-output linkages, multi-sector Calvo model, monetary policy
JEL Classification: E30, E32, E52
Suggested Citation: Suggested Citation