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Shocks and Adjustments

Mary Daly (), John Fernald (), Oscar Jorda () and Fernanda Nechio

No 2013-32, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We develop a multisector model in which capital and labor are free to move across firms within each sector, but cannot move across sectors. To isolate the role of sectoral specificity, we compare our model with otherwise identical multisector economies with either economy-wide factor markets (as in Chari et al. 2000) or firm-specific factor markets (as in Woodford 2005). Sectoral specificity induces within-sector strategic substitutability and across-sector strategic complementarity in price setting. Our model can produce either more or less monetary non-neutrality than those other two models, depending on the distribution of price rigidity across sectors. Under the empirical distribution for the U.S., our model behaves similarly to an economy with firm-specific factors in the short-run, and later on approaches the dynamics of the model with economy-wide factor markets. This is consistent with the idea that factor price equalization might take place gradually over time, so that firm-specificity might be a reasonable short-run approximation, whereas economy-wide markets might be a better description of how factors of production are allocated in the longer run.

JEL-codes: E23 E24 E32 J20 (search for similar items in EconPapers)
Date: 2013, Revised 2017-07-01
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DOI: 10.24148/wp2013-32

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