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Sectoral price rigidity and aggregate dynamics

Listed author(s):
  • Bouakez, Hafedh
  • Cardia, Emanuela
  • Ruge-Murcia, Francisco

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.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 65 (2014)
Issue (Month): C ()
Pages: 1-22

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Handle: RePEc:eee:eecrev:v:65:y:2014:i:c:p:1-22
DOI: 10.1016/j.euroecorev.2013.09.009
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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