The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy

Ernesto Pasten, Raphael Schoenle and Michael Weber

No 25303, NBER Working Papers from National Bureau of Economic Research, Inc

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. Empirically, heterogeneity in the frequency of price adjustment is the most important driver behind large real effects, whereas heterogeneity in input-output linkages contributes only marginally, with differences in consumption shares in between. Heterogeneity in price rigidity further is key in determining which sectors are the most important contributors to the transmission of monetary shocks, and is necessary but not sufficient to generate realistic output correlations. 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.

JEL-codes: E20 E32 E52 (search for similar items in EconPapers)
Date: 2018-11
New Economics Papers: this item is included in nep-mac
Note: EFG ME
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Citations: View citations in EconPapers (35)

Published as Ernesto Pasten & Raphael Schoenle & Michael Weber, 2019. "The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy," Journal of Monetary Economics, .

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Related works:
Journal Article: The propagation of monetary policy shocks in a heterogeneous production economy (2020)
Working Paper: The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy (2020)
Working Paper: The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy (2019)
Working Paper: The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy (2018)
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