Services Deepening and the Transmission of Monetary Policy

Abstract

The structural transformation from manufacturing to services comes with a process of services deepening: the services share of intermediate inputs rises over time. Moreover, inflation reacts less to monetary policy shocks in countries that are more intensive in services intermediates. We rationalize these facts using a two-sector New Keynesian model where trends in sectoral productivities generate endogenous variations in the Input–Output matrix. Services deepening reduces the contemporaneous response of inflation to monetary policy shocks through a marginal cost channel. Since services prices are stickier than manufacturing prices, the rise of services intermediates raises the sluggishness of sectoral marginal costs and inflation rates.

Structural Transformation and Tax Efficiency

“…Many countries have also been experiencing a process of premature deindustrialization before achieving a critical mass in manufacturing and reaching high-income status(Rowthorn and Ramaswamy, 1999;Autor and Dorn, 2013;Rodrik, 2016).2 In the U.S. economy, for example, the share of services inputs in manufacturing increased from 26 percent in 1970 to 35 percent in 2010, while the share of services inputs in services rose from 65 percent to 83 percent(Galesi and Rachedi, 2018).©International Monetary Fund. Not for Redistribution…”

Young Firms and Monetary Policy Transmission

“…In this section, we explore the robustness of our baseline results to the inclusion of additional statelevel controls. First, we focus on the role of sectoral composition of firm activity, motivated by Galesi and Rachedi (2019) who show that the distribution of firms across sectors matters for the transmission of monetary policy. To this end, we exploit the available information in the BDS and include the share of manufacturing firms among the set of explanatory variables.…”

The Changing Structure of Government Consumption Spending

“…Although structural changes are typically long‐run phenomena, a growing body of the literature suggests that they can affect the short‐run behavior of an economy, influencing its real business cycles (Da‐Rocha and Restuccia, 2006; Moro, 2012, 2015) and the effectiveness of monetary policy (Galesi and Rachedi, 2019). The second contribution of this article is to show that the changing structure of government spending emerges together with a change in the transmission of fiscal policy.…”