The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy

38 Pages Posted: 22 Nov 2018 Last revised: 6 Jan 2020

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; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: December 2019

Abstract

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

Pasten, Ernesto and Schoenle, Raphael and Weber, Michael, The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy (December 2019). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2018-78, Chicago Booth Research Paper No. 18-11, Fama-Miller Working Paper, 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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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