The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy
38 Pages Posted: 22 Nov 2018 Last revised: 6 Jan 2020
Date Written: December 2019
Realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages in the transmission of monetary policy shocks. Quantitatively, heterogeneity in price stickiness is the central driver for real effects. Input-output linkages and consumption shares alter the identity of the most important sectors to the transmission. 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 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: Suggested Citation