The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy

66 Pages Posted: 22 Nov 2018 Last revised: 1 Aug 2019

See all articles by Ernesto Pasten

Ernesto Pasten

University of Toulouse 1 - Toulouse School of Economics (TSE)

Raphael Schoenle

Brandeis University

Michael Weber

University of Chicago - Finance

Multiple version iconThere are 3 versions of this paper

Date Written: July 2018

Abstract

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. Quantitatively, heterogeneity in the frequency of price adjustment is the most important driver behind large real effects. Heterogeneity in input-output linkages and consumption shares contribute only marginally to real effects but alter substantially the identity and contribution of the most important sectors to the transmission of monetary shocks. 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 and ignoring heterogeneous consumption shares and input-output linkages identifies the wrong sectors from which the real effects originate.

Keywords: Input-output linkages, multi-sector Calvo model, monetary policy

JEL Classification: E30, E32, E52

Suggested Citation

Pasten, Ernesto and Schoenle, Raphael and Weber, Michael, The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy (July 2018). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2018-78; Chicago Booth Research Paper No. 18-11. Available at SSRN: https://ssrn.com/abstract=3288756 or http://dx.doi.org/10.2139/ssrn.3288756

Ernesto Pasten

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Raphael Schoenle

Brandeis University ( email )

Waltham, MA 02454
United States

Michael Weber (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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