Research / BFI Working PaperJul 31, 2019

The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy

Ernesto Pasten, Raphael Schoenle, Michael Weber

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 Jul 30, 2018

Dissecting Characteristics Nonparametrically

Joachim Freyberger, Andreas Neuhierl, Michael Weber
Topics:  Fiscal Studies, Financial Markets
BFI Working Paper Apr 13, 2020

Labor Markets During the COVID-19 Crisis: A Preliminary View

Olivier Coibion, Yuriy Gorodnichenko, Michael Weber
Topics:  COVID-19, Employment & Wages
BFI Working Paper Aug 1, 2016

The Effect of Unconventional Fiscal Policy on Consumption Expenditure

Michael Weber, Daniel Hoang, Francesco D'Acunto
Topics:  Fiscal Studies