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Price rigidities and the granular origins of aggregate fluctuations

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  • Pasten, Ernosto
  • Schoenle, Raphael
  • Weber, Michael

Abstract

We study the ability of sectoral shocks to generate aggregate fluctuations in a multi-sector general equilibrium model featuring sectoral heterogeneity in price stickiness, sector size, and input-output linkages. We show fat-tailed distributions of sectoral size or network centrality are neither necessary nor sufficient for idiosyncratic shocks to generate aggregate fluctuations when the responsiveness of prices to shocks varies across sectors. We derive conditions under which a frictional origin of aggregate fluctuations arises, that is, when micro shocks contribute to aggregate fluctuations in an economy with heterogeneous price rigidities but equal sector size and network centrality across sectors. We calibrate a 341-sector version of the to the United States and a quantitatively large frictional effect. When we allow for heterogeneities in price rigidity, sector size, and network centrality, the effect of micro shocks on GDP volatility doubles relative to a frictionless economy. Heterogeneity in price rigidity also substantially changes the identity of the sectors from which GDP fluctuations originate.

Suggested Citation

  • Pasten, Ernosto & Schoenle, Raphael & Weber, Michael, 2018. "Price rigidities and the granular origins of aggregate fluctuations," Research Discussion Papers 3/2018, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:2018_003
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    Cited by:

    1. Ernesto Pasten & Raphael S. Schoenle & Michael Weber & Michael Weber, 2018. "The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy," CESifo Working Paper Series 7376, CESifo.
    2. David Rezza Baqaee & Emmanuel Farhi, 2020. "Productivity and Misallocation in General Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 135(1), pages 105-163.
    3. Eric Anderson & Sergio Rebelo & Arlene Wong, 2018. "Markups Across Space and Time," NBER Working Papers 24434, National Bureau of Economic Research, Inc.
    4. Carvalho, Vasco M & Tahbaz-Salehi, Alireza, 2018. "Production Networks: A Primer," CEPR Discussion Papers 13421, C.E.P.R. Discussion Papers.
    5. Francesco D'Acunto & Michael Weber & Jin Xie & Michael Weber, 2019. "Punish One, Teach A Hundred: The Sobering Effect of Punishment on the Unpunished," CESifo Working Paper Series 7512, CESifo.
    6. Joris Tielens, 2019. "Pipeline Pressures and Sectoral Inflation Dynamics," 2019 Meeting Papers 856, Society for Economic Dynamics.
    7. Frank Smets & Joris Tielens & Jan Van Hove, 2018. "Pipeline Pressures and Sectoral Inflation Dynamics," Working Paper Research 351, National Bank of Belgium.
    8. Emmanuel Dhyne & Glenn Magerman & Ayumu Ken kikkawa, 2019. "Imperfect Competition in Firm-to-Firm Trade," Working Papers ECARES 2019-05, ULB -- Universite Libre de Bruxelles.
    9. Dong, Feng & Wen, Yi, 2019. "Long and Plosser meet Bewley and Lucas," Journal of Monetary Economics, Elsevier, vol. 102(C), pages 70-92.

    More about this item

    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
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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