IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_7190.html
   My bibliography  Save this paper

Price Rigidity and the Origins af Aggregate Fluctuations

Author

Listed:
  • Ernesto Pasten
  • Raphael S. Schoenle
  • Michael Weber
  • Michael Weber

Abstract

We document a novel role of heterogeneity in price rigidity: It strongly amplifies the capacity of idiosyncratic shocks to drive aggregate fluctuations. Heterogeneity in price rigidity also completely changes the identity of sectors from which fluctuations originate. We show these results both theoretically and empirically through the lens of a multi-sector model featuring heterogeneous GDP shares, input-output linkages, and idiosyncratic productivity shocks. Quantitatively, we calibrate our model to 341 sectors and find sectoral productivity shocks can give rise to aggregate fluctuations that are half as large as those arising from an aggregate productivity shock. Heterogeneous price rigidity amplifies the aggregate fluctuations by a factor of more than 2 relative to a flexible-price or homogeneous sticky price economy. Hence, idiosyncratic shocks and heterogeneous price rigidity can account for large parts of aggregate fluctuations and there is hope we will not “forever remain ignorant of the fundamental causes of economic fluctuations” (Cochrane (1994)).

Suggested Citation

  • Ernesto Pasten & Raphael S. Schoenle & Michael Weber & Michael Weber, 2018. "Price Rigidity and the Origins af Aggregate Fluctuations," CESifo Working Paper Series 7190, CESifo.
  • Handle: RePEc:ces:ceswps:_7190
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp7190.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Peter J. Klenow & Oleksiy Kryvtsov, 2008. "State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(3), pages 863-904.
    2. Lorenzo Caliendo & Fernando Parro & Esteban Rossi-Hansberg & Pierre-Daniel Sarte, 2018. "The Impact of Regional and Sectoral Productivity Changes on the U.S. Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(4), pages 2042-2096.
    3. Simon Gilchrist & Raphael Schoenle & Jae Sim & Egon Zakrajšek, 2017. "Inflation Dynamics during the Financial Crisis," American Economic Review, American Economic Association, vol. 107(3), pages 785-823, March.
    4. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    5. Vasco M Carvalho & Makoto Nirei & Yukiko U Saito & Alireza Tahbaz-Salehi, 2021. "Supply Chain Disruptions: Evidence from the Great East Japan Earthquake," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(2), pages 1255-1321.
    6. Andrew T. Foerster & Pierre-Daniel G. Sarte & Mark W. Watson, 2011. "Sectoral versus Aggregate Shocks: A Structural Factor Analysis of Industrial Production," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 1-38.
    7. David Rezza Baqaee & Emmanuel Farhi, 2019. "The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem," Econometrica, Econometric Society, vol. 87(4), pages 1155-1203, July.
    8. Bernard Herskovic, 2015. "Networks in Production: Asset Pricing Implications," 2015 Meeting Papers 378, Society for Economic Dynamics.
    9. Virgiliu Midrigan, 2011. "Menu Costs, Multiproduct Firms, and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(4), pages 1139-1180, July.
    10. Basu, Susanto, 1995. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," American Economic Review, American Economic Association, vol. 85(3), pages 512-531, June.
    11. Vasco Carvalho & Xavier Gabaix, 2013. "The Great Diversification and Its Undoing," American Economic Review, American Economic Association, vol. 103(5), pages 1697-1727, August.
    12. Julian di Giovanni & Andrei A. Levchenko & Isabelle Mejean, 2014. "Firms, Destinations, and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 82(4), pages 1303-1340, July.
    13. Charles R. Hulten, 1978. "Growth Accounting with Intermediate Inputs," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(3), pages 511-518.
    14. Julian di Giovanni & Andrei A. Levchenko & Isabelle Mejean, 2018. "The Micro Origins of International Business-Cycle Comovement," American Economic Review, American Economic Association, vol. 108(1), pages 82-108, January.
    15. Herskovic, Bernard & Kelly, Bryan & Lustig, Hanno & Van Nieuwerburgh, Stijn, 2016. "The common factor in idiosyncratic volatility: Quantitative asset pricing implications," Journal of Financial Economics, Elsevier, vol. 119(2), pages 249-283.
    16. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2017. "Microeconomic Origins of Macroeconomic Tail Risks," American Economic Review, American Economic Association, vol. 107(1), pages 54-108, January.
    17. Enghin Atalay, 2017. "How Important Are Sectoral Shocks?," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(4), pages 254-280, October.
    18. Bhattarai, Saroj & Schoenle, Raphael, 2014. "Multiproduct firms and price-setting: Theory and evidence from U.S. producer prices," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 178-192.
    19. Emi Nakamura & Jón Steinsson, 2010. "Monetary Non-neutrality in a Multisector Menu Cost Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(3), pages 961-1013.
    20. Vasco M. Carvalho, 2014. "From Micro to Macro via Production Networks," Journal of Economic Perspectives, American Economic Association, vol. 28(4), pages 23-48, Fall.
    21. Saki Bigio & Jennifer La’O, 2020. "Distortions in Production Networks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(4), pages 2187-2253.
    22. Vasco M. Carvalho & Basile Grassi, 2019. "Large Firm Dynamics and the Business Cycle," American Economic Review, American Economic Association, vol. 109(4), pages 1375-1425, April.
    23. Cecile Gaubert & Oleg Itskhoki, 2021. "Granular Comparative Advantage," Journal of Political Economy, University of Chicago Press, vol. 129(3), pages 871-939.
    24. Jean Boivin & Marc P. Giannoni & Ilian Mihov, 2009. "Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data," American Economic Review, American Economic Association, vol. 99(1), pages 350-384, March.
    25. Allen Head & Lucy Qian Liu & Guido Menzio & Randall Wright, 2012. "Sticky Prices: A New Monetarist Approach," Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 939-973, October.
    26. D’Acunto, Francesco & Liu, Ryan & Pflueger, Carolin & Weber, Michael, 2018. "Flexible prices and leverage," Journal of Financial Economics, Elsevier, vol. 129(1), pages 46-68.
    27. Daron Acemoglu & Vasco M. Carvalho & Asuman Ozdaglar & Alireza Tahbaz‐Salehi, 2012. "The Network Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 80(5), pages 1977-2016, September.
    28. Saki Bigio, 2013. "Financial Frictions in Production Networks," 2013 Meeting Papers 121, Society for Economic Dynamics.
    29. Michael Weber & Ali Ozdagli, 2016. "Monetary Policy Through Production Networks: Evidence from the Stock Market," 2016 Meeting Papers 148, Society for Economic Dynamics.
    30. Daron Acemoglu & Ufuk Akcigit & William Kerr, 2016. "Networks and the Macroeconomy: An Empirical Exploration," NBER Macroeconomics Annual, University of Chicago Press, vol. 30(1), pages 273-335.
    31. Bernard Herskovic & Bryan Kelly & Hanno Lustig & Stijn Van Nieuwerburgh, 2020. "Firm Volatility in Granular Networks," Journal of Political Economy, University of Chicago Press, vol. 128(11), pages 4097-4162.
    32. Xavier Gabaix & Rustam Ibragimov, 2011. "Rank - 1 / 2: A Simple Way to Improve the OLS Estimation of Tail Exponents," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 29(1), pages 24-39, January.
    33. Vasco M Carvalho & Makoto Nirei & Yukiko U Saito & Alireza Tahbaz-Salehi, 0. "Supply Chain Disruptions: Evidence from the Great East Japan Earthquake," The Quarterly Journal of Economics, Oxford University Press, vol. 136(2), pages 1255-1321.
    34. Carlos Carvalho & Jae Won Lee & Woong Yong Park, 2021. "Sectoral Price Facts in a Sticky-Price Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(1), pages 216-256, January.
    35. Basile Grassi, 2017. "IO in I-O: Competition and Volatility in Input-Output Networks," 2017 Meeting Papers 1637, Society for Economic Dynamics.
    36. David Rezza Baqaee, 2018. "Cascading Failures in Production Networks," Econometrica, Econometric Society, vol. 86(5), pages 1819-1838, September.
    37. Jordi Galí, 2015. "Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework and Its Applications Second edition," Economics Books, Princeton University Press, edition 2, number 10495.
    38. Yuriy Gorodnichenko & Michael Weber, 2016. "Are Sticky Prices Costly? Evidence from the Stock Market," American Economic Review, American Economic Association, vol. 106(1), pages 165-199, January.
    39. Vasco M. Carvalho, 2014. "From Micro to Macro via Production Networks," Working Papers 793, Barcelona School of Economics.
    40. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, May.
    41. Dupor, Bill, 1999. "Aggregation and irrelevance in multi-sector models," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 391-409, April.
    42. Robert C. Feenstra & Philip Luck & Maurice Obstfeld & Katheryn N. Russ, 2018. "In Search of the Armington Elasticity," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 135-150, March.
    43. Jean-Noël Barrot & Julien Sauvagnat, 2016. "Input Specificity and the Propagation of Idiosyncratic Shocks in Production Networks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(3), pages 1543-1592.
    44. Bouakez, Hafedh & Cardia, Emanuela & Ruge-Murcia, Francisco, 2014. "Sectoral price rigidity and aggregate dynamics," European Economic Review, Elsevier, vol. 65(C), pages 1-22.
    45. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
    46. Gabaix, Xavier & Ibragimov, Rustam, 2011. "Rank − 1 / 2: A Simple Way to Improve the OLS Estimation of Tail Exponents," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(1), pages 24-39.
    47. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
    48. Fernando Alvarez & Hervé Le Bihan & Francesco Lippi, 2016. "The Real Effects of Monetary Shocks in Sticky Price Models: A Sufficient Statistic Approach," American Economic Review, American Economic Association, vol. 106(10), pages 2817-2851, October.
    49. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(4), pages 1415-1464.
    50. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
    51. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    52. Michael Horvath, 1998. "Cyclicality and Sectoral Linkages: Aggregate Fluctuations from Independent Sectoral Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 781-808, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pasten, Ernesto & Schoenle, Raphael & Weber, Michael, 2020. "The propagation of monetary policy shocks in a heterogeneous production economy," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 1-22.
    2. Elisa Rubbo, 2023. "Networks, Phillips Curves, and Monetary Policy," Econometrica, Econometric Society, vol. 91(4), pages 1417-1455, July.
    3. Vasco M. Carvalho & Alireza Tahbaz-Salehi, 2019. "Production Networks: A Primer," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 635-663, August.
    4. Schoenle, Raphael & Müller, Gernot & Pasten, Ernesto & Weber, Michael, 2020. "Big G," CEPR Discussion Papers 14625, C.E.P.R. Discussion Papers.
      • Lydia Cox & Gernot Müller & Ernesto Pastén & Raphael Schoenle & Michael Weber, 2020. "Big G," NBER Working Papers 27034, National Bureau of Economic Research, Inc.
      • Lydia Cox & Gernot Muller & Ernesto Pasten & Raphael Schoenle & Michael Weber, 2020. "Big G," Working Papers Central Bank of Chile 878, Central Bank of Chile.
      • Lydia Cox & Gernot J. Müller & Ernesto Pasten & Raphael Schoenle & Michael Weber, 2020. "Big G," Working Papers 2020-36, Becker Friedman Institute for Research In Economics.
      • Lydia Cox & Gernot J. Müller & Ernesto Pasten & Raphael Schoenle, 2020. "Big G," Working Papers 20-15, Federal Reserve Bank of Cleveland.
      • Lydia Cox & Gernot Müller & Ernesto Pasten & Raphael S. Schoenle & Michael Weber & Michael Weber, 2020. "Big G," CESifo Working Paper Series 8229, CESifo.
    5. David Rezza Baqaee & Emmanuel Farhi, 2020. "Productivity and Misallocation in General Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(1), pages 105-163.
    6. Michael Weber & Ali Ozdagli, 2016. "Monetary Policy Through Production Networks: Evidence from the Stock Market," 2016 Meeting Papers 148, Society for Economic Dynamics.
    7. Andrew T. Foerster & Eric LaRose & Pierre-Daniel G. Sarte, 2018. "Idiosyncratic Sectoral Growth, Balanced Growth, and Sectoral Linkages," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 79-101.
    8. Shutao Cao & Wei Dong, 2019. "Production Networks and the Propagation of Commodity Price Shocks," 2019 Meeting Papers 612, Society for Economic Dynamics.
    9. Niko Hauzenberger & Michael Pfarrhofer, 2021. "Bayesian State‐Space Modeling for Analyzing Heterogeneous Network Effects of US Monetary Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 123(4), pages 1261-1291, October.
    10. Simon Mongey, 2017. "Market Structure and Monetary Non-Neutrality," 2017 Meeting Papers 184, Society for Economic Dynamics.
    11. Henkel, Lukas, 2020. "Sectoral output effects of monetary policy: do sticky prices matter?," Working Paper Series 2473, European Central Bank.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ernesto Pasten & Raphael S. Schoenle & Michael Weber & Michael Weber, 2017. "Price Rigidities and the Granular Origins of Aggregate Fluctuations," CESifo Working Paper Series 6619, CESifo.
    2. repec:zbw:bofrdp:2018_003 is not listed on IDEAS
    3. Pasten, Ernesto & Schoenle, Raphael & Weber, Michael, 2017. "Price rigidities and the granular origins of aggregate fluctuations," Working Paper Series 2102, European Central Bank.
    4. Michael Weber & Ali Ozdagli, 2016. "Monetary Policy Through Production Networks: Evidence from the Stock Market," 2016 Meeting Papers 148, Society for Economic Dynamics.
    5. Dong, Feng & Wen, Yi, 2019. "Long and Plosser meet Bewley and Lucas," Journal of Monetary Economics, Elsevier, vol. 102(C), pages 70-92.
    6. Pasten, Ernesto & Schoenle, Raphael & Weber, Michael, 2020. "The propagation of monetary policy shocks in a heterogeneous production economy," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 1-22.
    7. Michael Weber & Ali Ozdagli, 2016. "Monetary Policy Through Production Networks: Evidence from the Stock Market," 2016 Meeting Papers 148, Society for Economic Dynamics.
    8. Frank Smets & Joris Tielens & Jan Van Hove, 2018. "Pipeline Pressures and Sectoral Inflation Dynamics," Working Paper Research 351, National Bank of Belgium.
    9. Glenn Magerman & Karolien De Bruyne & Emmanuel Dhyne & Jan Van Hove, 2016. "Heterogeneous firms and the micro origins of aggregate fluctuations," Working Paper Research 312, National Bank of Belgium.
    10. David Rezza Baqaee & Emmanuel Farhi, 2019. "The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem," Econometrica, Econometric Society, vol. 87(4), pages 1155-1203, July.
    11. David Rezza Baqaee, 2018. "Cascading Failures in Production Networks," Econometrica, Econometric Society, vol. 86(5), pages 1819-1838, September.
    12. Emmanuel Dhyne & Ayumu Ken Kikkawa & Glenn Magerman, 2022. "Imperfect Competition in Firm-to-Firm Trade," Journal of the European Economic Association, European Economic Association, vol. 20(5), pages 1933-1970.
    13. Kristina Barauskaite & Anh Dinh Minh Nguyen, 2021. "Direct and network effects of idiosyncratic TFP shocks," Empirical Economics, Springer, vol. 60(6), pages 2765-2793, June.
    14. Kristina Barauskaite & Anh D. M. Nguyen, 2022. "Intersectoral network‐based channel of aggregate TFP shocks," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 3897-3910, October.
    15. Baqaee, David Rezza & Farhi, Emmanuel, 2018. "Macroeconomics with Heterogeneous Agents and Input-Output Networks," CEPR Discussion Papers 13006, C.E.P.R. Discussion Papers.
    16. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2017. "Microeconomic Origins of Macroeconomic Tail Risks," American Economic Review, American Economic Association, vol. 107(1), pages 54-108, January.
    17. Imbs, Jean & Pauwels, Laurent, 2019. "Fundamental Moments," CEPR Discussion Papers 13662, C.E.P.R. Discussion Papers.
    18. Barauskaite, Kristina & Nguyen, Anh D.M., 2021. "Global intersectoral production network and aggregate fluctuations," Economic Modelling, Elsevier, vol. 102(C).
    19. Yukiko Saito & Makoto Nirei & Vasco Carvalho, 2014. "Supply Chain Disruptions: Evidence from Great East Japan Earthquake," 2014 Meeting Papers 595, Society for Economic Dynamics.
    20. Vallès Codina, Oriol, 2023. "Business cycles, sectoral price stabilization, and climate change mitigation: A model of multi-sector growth in the tradition of the Bielefeld disequilibrium approach," Journal of Economic Behavior & Organization, Elsevier, vol. 216(C), pages 636-653.
    21. Ernesto Pasten & Raphael Schoenle & Michael Weber, 2020. "Price Rigidity and the Granular Origins of Aggregate Fluctuations," Working Papers Central Bank of Chile 864, Central Bank of Chile.

    More about this item

    Keywords

    input-output linkages; nominal price rigidity; idiosyncratic shocks;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_7190. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.