Monetary Non-Neutrality in a Multisector Economy: The Role of Risk-Sharing

Jae Won Lee and Seunghyeon Lee

Review of Economic Dynamics, 2025, vol. 55

Abstract: We show that the degree of risk-sharing among heterogeneous workers is a key determinant of monetary non-neutrality in a multisector sticky-price model. In this framework, workers are employed across different sectors, earning distinct wages. The limited ability of workers to fully insure against labor income risks results in strategic complementarity in firms' price-setting decisions with respect to aggregate shocks and strategic substitutability with respect to idiosyncratic shocks. These pricing interactions lead to sluggish adjustments of the price level in response to monetary and other aggregate shocks, causing significant fluctuations in the output gap while maintaining large responses of individual prices to idiosyncratic shocks. We illustrate these results across three stylized asset market scenarios: complete markets, non-contingent bond-only markets, and financial autarky. (Copyright: Elsevier)

Keywords: Multisector models; Heterogeneity; Nominal rigidities; Real rigidities; Monetary non-neutrality; Aggregate and sectoral shocks (search for similar items in EconPapers)
JEL-codes: E30 E31 E32 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1016/j.red.2024.101241

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