The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy
||Original Paper: WP 19-25|
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 codes: E31, E32, O40.
Suggested citation: Pasten, Ernesto, Raphael Schoenle, and Michael Weber. 2020. “The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy.” Federal Reserve Bank of Cleveland, Working Paper no. 19-25R. https://doi.org/10.26509/frbc-wp-201925r.