The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy

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. Resumen Este artículo estudia la transmisión de la política monetaria en una economía donde interactúan tres dimensiones de heterogeneidad entre sectores que son empíricamente relevantes: rigideces nominales, tamaño y relaciones insumo-producto. Se obtienen condiciones en que estas tres formas de heterogeneidad amplifican el efecto real de la política monetaria. De ellas, la heterogeneidad en la frecuencia de cambios de precios es la más relevante cuantitativamente; heterogeneidad en tamaño y relaciones insumo-producto sólo tienen un impacto marginal. Tanto en el modelo como en el análisis empírico, reducir el nivel de desagregación reduce el efecto real de la política monetaria manteniendo un efecto similar sobre la inflación. Por lo tanto, la práctica usual de enfocarse en el efecto de la política monetaria sobre los precios no provee información suficiente para deducir su  We thank

Monetary policy, crisis and capital centralization in corporate ownership and control networks: A B-Var analysis

“…Furthermore, with respect to the specific field of monetary policy, the Bank of England's chief economist calls for an understanding of the complex international monetary network dynamics as a pre-requisite for effective management of monetary policies (Haldane 2014). Among the contributions that have followed this suggestion, Pasten et al (2018) develop a multi-sector model to study the quantitative importance of input-output linkages and their interaction for the real effects of monetary policy shocks. Empirically, they find that the size and interconnectedness of a sector and the interaction with frequencies of price adjustment matter for the real effects of monetary policy.…”

Networks in Production: Asset Pricing Implications

“…This paper is also closely related to the literature on the importance of sectoral shocks for economic aggregates. The multisector model developed in this 2 Recent contributions to the literature on networks and finance include Hou and Robinson (2006), Cohen, Frazzini, and Malloy (2008), , Carvalho (2010), Gofman (2011), Carvalho andGabaix (2013), Li and Schürhoff (2013), Ahern and Harford (2014), Aobdia, Caskey, and Ozel (2014), Carvalho and Voigtlander (2014), ), Farboodi (2014, Tahbaz-Salehi (2015a, 2015b), Carvalho and Grassi (2015), Neklyudov and Sambalaibat (2015), Babus and Parlatore (2016), Eisfeldt et al (2018), Babus (2016), Babus and Kondor (2016), Biggio and La'O (2016), Carvalho et al (2016), Pasten, Schoenle, and Weber (2016), Richmond (2016), Wu (2016), Babus and Hu (2017), Denbee et al (2017), Gofman (2017), Hollifield, Neklyudov, and Spatt (2017), Malamud and Rostek (2017), and Ozdagli and Weber (2017). Allen and Babus (2009) present a detailed review of network models applied to finance.…”

Heterogeneous Price Rigidities and Monetary Policy

“…While many dimensions of sectoral heterogeneity can give rise to these channels, we investigate them in the presence of heterogeneity in price rigidities across sectors. Price stickiness is the key source of monetary non-neutrality in New-Keynesian models and it is known to be heterogeneous across sectors (Nakamura and Steinsson (2008) and Pasten et al (2016)). Our paper investigates the implications of heterogeneous price rigidities for the distributional and aggregate effects of monetary policy.…”

“…Our dataset brings together information on price rigidities, spending and payroll across detailed industries, covering the entire economy excluding shelter. To measure price rigidities across sectors, we rely on the data made publicly available by Nakamura and Steinsson (2008) for final goods and by Pasten et al (2016) for intermediates. We obtain data on college spending shares from the Consumer Expenditure Survey (CEX) and on industry college payroll shares from the American Community Survey (ACS).…”

“…Our final reduced-form finding links structural change to price rigidities. Services feature a much higher degree of price rigidity than industries producing goods (e.g., Nakamura and Steinsson (2008) and Pasten et al (2016)). Given that services account for an increasing share of both expenditures and payroll over time (e.g., Comin et al (2018), the effective degree of price rigidities in the U.S. economy increases over time.…”