Sectoral price rigidity and aggregate dynamics

This paper studies the business cycle implications of sectoral heterogeneity in price rigidity using a highly disaggregated multi-sector model. The model is estimated by the Simulated Method of Moments using a mix of aggregate and sectoral U.S. data. The frequencies of price changes implied by our e...

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Bibliographic Details
Published in:European economic review 2014-01, Vol.65, p.1-22
Main Authors: Bouakez, Hafedh, Cardia, Emanuela, Ruge-Murcia, Francisco
Format: Article
Language:English
Subjects:
Business cycles
Econometrics
Economic theory
Estimating techniques
Estimation
Federal Reserve monetary policy
Inflation
Monetary policy
Multi-sector models
Price stickiness
Prices
Sectoral planning
Sectoral shocks
Simulated method of moments
Studies
U.S.A
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Summary:This paper studies the business cycle implications of sectoral heterogeneity in price rigidity using a highly disaggregated multi-sector model. The model is estimated by the Simulated Method of Moments using a mix of aggregate and sectoral U.S. data. The frequencies of price changes implied by our estimates are consistent with those reported in micro-based studies. We show that heterogeneity in price rigidity is the primary factor explaining the heterogeneity in the responses of sectoral output and inflation to a monetary policy shock. We also find that ignoring sectoral heterogeneity in price rigidity leads to the mismeasurement of the relative importance of aggregate and sector-specific shocks in aggregate and sectoral fluctuations. •Estimate a highly disaggregated multi-sector model with heterogeneous price rigidity.•Heterogeneity in price rigidity explains the differences in sectoral inflation responses to a monetary policy shock.•It has critical implications regarding the relative importance of the various shocks for aggregate fluctuations.
ISSN:0014-2921
1873-572X
DOI:10.1016/j.euroecorev.2013.09.009