Heterogeneous Price Rigidities and Monetary Policy

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.

Price stickiness along the income distribution and the effects of monetary policy

“…Kaplan and Schulhofer-Wohl (2017) document substantial cross-sectional dispersion in household inflation rates, while Coibion et al (2015) study the impact of local economic conditions on the geographical variation in prices paid by consumers. Ongoing work by Clayton et al (2018) focuses differences in price stickiness of goods consumed by, and produced by, college-educated workers. Our paper documents new facts and proposes a novel mechanism, that is based on differential price stickiness of consumption items along the income distribution.…”

Price Stickiness along the Income Distribution and the Effects of Monetary Policy

“…Kaplan and Schulhofer-Wohl (2017) document substantial cross-sectional dispersion in household inflation rates, while Coibion et al (2015) study the impact of local economic conditions on the geographical variation in prices paid by consumers. Ongoing work by Clayton et al (2018) focuses differences in price stickiness of goods consumed by, and produced by, college-educated workers. Our paper documents new facts and proposes a novel mechanism, that is based on differential price stickiness of consumption items along the income distribution.…”

Inflation Inequality: Measurement, Causes, and Policy Implications

“…Nakamura & Steinsson (2008) and Pasten et al (2019) show that price rigidities vary substantially across product categories. Clayton et al (2018) and Cravino et al (2020) find that more educated and richer households tend to have larger expenditure shares on more rigid sectors. Differential exposure to price rigidity across the income distribution arises in part because richer households spend more on services, which are more rigid than goods; but similar heterogeneity is observed even within services and within manufacturing.…”

“…Differential exposure to price rigidity across the income distribution arises in part because richer households spend more on services, which are more rigid than goods; but similar heterogeneity is observed even within services and within manufacturing. Clayton et al (2018) study the consequences of this fact for monetary policy using a heterogeneous-agent New Keynesian model. Consider a contractionary monetary policy shock: An increase in the nominal interest rate reduces current aggregate demand and activity and leads to a fall in prices.…”