Effects of monetary policy shocks across time and across sectors
AbstractRecent empirical research by Olivei and Tenreyro (2007) demonstrates that the effect of monetary policy shocks on output and prices depends on the shock's timing: In the United States, a monetary policy shock that takes place in the first half of the year has a larger effect on output than on prices, while the opposite is true in the second half of the year. Olivei and Tenreyro argue that this finding reflects the fact that a greater fraction of wage rates are re-contracted in the second half of the year, implying that wages (and prices) are less flexible in the first half. In this paper, I assess this explanation in light of several additional empirical results. Most importantly, I demonstrate that within-year differences in the responses of output and prices following a monetary policy shock are not more pronounced in the service-producing sector, where labor costs represent a larger fraction of total production costs. I also find that movements in prices following a monetary shock tend to lead wage changes. These and other empirical results suggest that something other than uneven wage adjustment might be responsible for the differential within-year effect of monetary policy shocks that Olivei and Tenreyro document.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2013-70.
Date of creation: 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-09 (All new papers)
- NEP-CBA-2013-11-09 (Central Banking)
- NEP-MAC-2013-11-09 (Macroeconomics)
- NEP-MON-2013-11-09 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Giovanni Olivei & Silvana Tenreyro, 2007.
"The Timing of Monetary Policy Shocks,"
American Economic Review,
American Economic Association, vol. 97(3), pages 636-663, June.
- Giovanni Olivei & Silvana Tenreyro, 2006. "The Timing of Monetary Policy Shocks," CEP Discussion Papers dp0725, Centre for Economic Performance, LSE.
- Giovanni Olivei & Silvana Tenreyro, 2004. "The timing of monetary policy shocks," Working Papers 04-1, Federal Reserve Bank of Boston.
- Giovanni Olivei & Silvana Tenreyro, 2006. "The timing of monetary policy shocks," LSE Research Online Documents on Economics 3742, London School of Economics and Political Science, LSE Library.
- Olivei, Giovanni & Tenreyro, Silvana, 2006. "The Timing of Monetary Policy Shocks," CEPR Discussion Papers 5716, C.E.P.R. Discussion Papers.
- Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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