The propagation of monetary policy shocks in a heterogeneous production economy

• Published in: Journal of monetary economics 2020-12, Vol.116, p.1-22
• Main Authors: Pasten, Ernesto, Schoenle, Raphael, Weber, Michael
• Format: Article
• Language: English
• Subjects: Input-output linkages; Monetary policy; Multi-sector Calvo model
• ISSN: 0304-3932; 1873-1295
• DOI: 10.1016/j.jmoneco.2019.10.001

•Monetary transmission under heterogeneous I/O linkages, frequency of price changes and sector size.•Heterogeneous frequency is most important, input-output and size heterogeneity contribute only marginally.•Reducing the number of sectors decreases monetary non-neutrality with a similar inflationary impact response.•Ignoring heterogeneous size and I/O linkages identifies the wrong sectors from which real effects originate. Realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages in the transmission of monetary policy shocks. Quantitatively, heterogeneity in price stickiness is the central driver for real effects. Input-output linkages and consumption shares alter the identity of the most important sectors to the transmission. 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 ignoring heterogeneous consumption shares and input-output linkages identifies the wrong sectors from which the real effects originate.