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. Quantitatively, heterogeneity in the frequency of price adjustment is the most important driver behind large real effects. Heterogeneity in input-output linkages and consumption shares contribute only marginally to real effects but alter substantially the identity and contribution of the most important sectors to the transmission of monetary shocks. 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 and ignoring heterogeneous consumption shares and input-output linkages identifies the wrong sectors from which the real effects originate.

More Research From These Scholars

BFI Working Paper Jan 25, 2018

Unconventional Fiscal Policy

Francesco D'Acunto, Daniel Hoang, Michael Weber
Topics:  Fiscal Studies
BFI Working Paper Nov 17, 2019

Estimating the Anomaly Base Rate

Alex Chinco, Andreas Neuhierl, Michael Weber
BFI Working Paper Dec 4, 2019

Perceived Precautionary Savings Motives: Evidence from FinTech

Francesco D'Acunto, Thomas Rauter, Christoph Scheuch, Michael Weber
Topics:  Fiscal Studies