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Nominal Rigidity and the Idiosyncratic Origin of Aggregate Fluctuations

Raphael Schoenle, Michael Weber and Ernesto Pasten
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Michael Weber: University of Chicago

No 1473, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We study the aggregate propagation of idiosyncratic, sectoral shocks in a multi-sector new-Keynesian model with intermediate inputs featuring sectoral heterogeneity in price stickiness, sectoral GDP, and input-output linkages. Heterogeneity of price rigidity distorts the "granular" effect of the fat-failed distribution of sectors' size as well as the "network" effect of the centrality of some sectors in the production network. This distortion involves the strength of the aggregate volatility generated by sectoral shocks as well as the identity of the most important sectors. The granular and the network effects may in fact be completely irrelevant while the empirical distribution of price stickiness may generate by itself sizable aggregate volatility from sectoral shocks. We calibrate our model to 350 sectors using US data to quantify the strenght and interaction of "granular", "network" and "frictional" sources of the aggregate propagation of sectoral shocks.

Date: 2016
New Economics Papers: this item is included in nep-dge, nep-mac and nep-net
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