Monetary Policy Transmission amid Demand Reallocations

Julien Bengui, Lu Han and Gaelan MacKenzie

Staff Working Papers from Bank of Canada

Abstract: Large swings in the expenditure shares of goods and services at the start of the pandemic have contributed to the inflation surge, posing new challenges for monetary policy. Using a multi-sector model featuring upward labor adjustment frictions, we analyze the transmission of monetary policy during a demand reallocation episode, focussing on sectoral heterogeneity in inflation and output responses. Following an unexpected contractionary monetary policy shock, (constrained) expanding sectors respond primarily by lowering prices, while (unconstrained) contracting sectors reduce output more significantly. At the aggregate level, monetary policy is thus more effective at curbing inflation when a larger proportion of sectors are expanding or expected to be expanding in the near future.

Keywords: Domestic demand and components; Inflation and prices; Monetary policy transmission (search for similar items in EconPapers)
JEL-codes: E12 E24 E31 E52 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2024-10
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Related works:
Working Paper: Monetary Policy Transmission amid Demand Reallocations (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:24-42

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