Heterogeneity in Sectoral Price Stickiness, Aggregate Dynamics and Monetary Policy Pitfalls with Real Shocks
AbstractAmple differences in sectoral price stickiness is a widely documented fact. This paper shows that in presence of real shocks, heterogeneity in sectoral price stickiness plays a key role in the determination of the aggregate dynamics. The larger price stickiness heterogeneity, the smaller the persistence of inflation and the volatility of inflation, interest rate and output-gap. Thus, two economies with the same average degree of sectoral price stickiness but unlike variance may behave very differently. In terms of monetary policy, they can require interest rate paths that substantially differ both qualitatively and quantitatively. Generally, with real shocks, disregarding the dispersion in sectoral price stickiness leads policymakers to overvalue the variation and persistence of inflation and output gap.
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Bibliographic InfoPaper provided by University of Pavia, Department of Economics and Management in its series DEM Working Papers Series with number 023.
Length: 34 pages
Date of creation: Nov 2012
Date of revision:
Price Stickiness Heterogeneity; Real Shocks; New Keynesian model; Persistence; Volatility; Monetary Policy Mistakes;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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- Flamini, Alessandro & Ascari, Guido & Rossi, Lorenza, 2012.
"Industrial Transformation, Heterogeneity in Price Stickiness, and the Great Moderation,"
Dynare Working Papers
- Alessandro Flamini & Guido Ascari & Lorenza Rossi, 2012. "Industrial Transformation, Heterogeneity in Price Stickiness, and the Great Moderation," DEM Working Papers Series 025, University of Pavia, Department of Economics and Management.
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