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The Relative Price and Relative Productivity Channels for Aggregate Fluctuations

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  • Swanson Eric T

    (Federal Reserve Bank of San Francisco)

Abstract

This paper demonstrates that sectoral heterogeneity itself, without additional bells or whistles, has important, first-order implications for the transmission of aggregate shocks to aggregate variables in an otherwise standard DSGE model. The effects of sectoral heterogeneity on this transmission are decomposed into two channels: a “relative price” channel and a “relative productivity” channel. The relative price channel results from changes in the relative prices of aggregates, such as investment vs. consumption, in response to a shock. The relative productivity channel arises from changes in the distribution of inputs across sectors. We show that, for standard multi-sector models, this latter channel is second-order, but becomes first-order if we consider a nontraded input such as capital utilization or introduce a wedge that thwarts the steady-state equalization of marginal products of a traded input across sectors. For reasonable parameterizations, the relative productivity channel causes aggregate productivity to vary procyclically in response to even non-technological shocks, such as changes in government purchases.

Suggested Citation

  • Swanson Eric T, 2006. "The Relative Price and Relative Productivity Channels for Aggregate Fluctuations," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-39, October.
    • Handle: RePEc:bpj:bejmac:v:contributions.6:y:2006:i:1:n:10
    DOI: 10.2202/1534-6005.1293
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    Cited by:

    1. Luca Guerrieri & Dale Henderson & Jinill Kim, 2014. "Modeling Investment‐Sector Efficiency Shocks: When Does Disaggregation Matter?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(3), pages 891-917, August.
    2. Basu, Susanto & Fernald, John G., 2002. "Aggregate productivity and aggregate technology," European Economic Review, Elsevier, vol. 46(6), pages 963-991, June.
    3. Michael Kloß & Oskar Krohmer & Joachim Ragnitz, 2012. "Self-financing of Government Aid Programs," ifo Dresden Studien, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 66, February.
    4. Sean Holly & Ivan Petrella, 2012. "Factor Demand Linkages, Technology Shocks, and the Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 948-963, November.
    5. Bianca Barbaro & Giorgio Massari & Patrizio Tirelli, 2022. "Who killed business dynamism in the U.S.?," Working Papers 494, University of Milano-Bicocca, Department of Economics, revised Aug 2022.
    6. Gabler Alain, 2011. "Sector-Specific Markup Fluctuations and the Business Cycle: A Cross-Country Analysis," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-32, December.

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