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Changes in the effects of monetary policy on disaggregate price dynamics

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  • Baumeister, Christiane
  • Liu, Philip
  • Mumtaz, Haroon

Abstract

Based on a time-varying factor-augmented vector autoregression, we demonstrate that the propagation mechanism of monetary policy disturbances differs across disaggregate components of personal consumption expenditures. While many disaggregate prices rise temporarily in response to a monetary tightening in the early part of the sample, there is no evidence of a price puzzle at the aggregate level. The share of disaggregate prices that exhibit the price puzzle diminishes from the early 1980s onwards. There also is evidence of a substantial decline in the dispersion of disaggregate price responses over time. This gradual decrease in cross-sectional heterogeneity of disaggregate price responses is associated with a dampening effect on aggregate real economic activity and a stronger effect on the aggregate price level. We illustrate by means of a multi-sector sticky-price model augmented by a cost channel how key structural parameters would have had to change to match this evolution of sectoral price dynamics.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 3 ()
Pages: 543-560

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:3:p:543-560

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Structural FAVAR; Time variation; Monetary transmission; Disaggregate prices; Heterogeneous pricing decisions;

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Cited by:
  1. Christiane Baumeister & Luca Benati, 2013. "Unconventional Monetary Policy and the Great Recession: Estimating the Macroeconomic Effects of a Spread Compression at the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 165-212, June.
  2. Barnett, Alina & Mumtaz, Haroon & Theodoridis, Konstantinos, 2012. "Forecasting UK GDP growth, inflation and interest rates under structural change: a comparison of models with time-varying parameters," Bank of England working papers 450, Bank of England.

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