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The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy

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  • Ernesto Pastén
  • Raphael Schoenle
  • Michael Weber

Abstract

We study the transmission of monetary policy shocks in a model in which realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages, and derive conditions under which these heterogeneities generate large real effects. Empirically, heterogeneity in the frequency of price adjustment is the most important driver behind large real effects, whereas heterogeneity in input-output linkages contributes only marginally, with differences in consumption shares in between. Heterogeneity in price rigidity further is key in determining which sectors are the most important contributors to the transmission of monetary shocks, and is necessary but not sufficient to generate realistic output correlations. In the model and data, reducing the number of sectors decreases monetary non-neutrality with a similar impact response of inflation. Hence, the initial response of inflation to monetary shocks is not sufficient to discriminate across models and for the real effects of nominal shocks.

Suggested Citation

  • Ernesto Pastén & Raphael Schoenle & Michael Weber, 2018. "The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy," NBER Working Papers 25303, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25303
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Michael Weber & Ali Ozdagli, 2016. "Monetary Policy Through Production Networks: Evidence from the Stock Market," 2016 Meeting Papers 148, Society for Economic Dynamics.
    2. Christian Matthes & Felipe Schwartzman, 2019. "The Demand Origins of Business Cycles," 2019 Meeting Papers 1122, Society for Economic Dynamics.
    3. repec:eee:ecolet:v:163:y:2018:i:c:p:193-196 is not listed on IDEAS
    4. David Rezza Baqaee & Emmanuel Farhi, 2017. "Productivity and Misallocation in General Equilibrium," NBER Working Papers 24007, National Bureau of Economic Research, Inc.
    5. Carvalho, Vasco M & Tahbaz-Salehi, Alireza, 2018. "Production Networks: A Primer," CEPR Discussion Papers 13421, C.E.P.R. Discussion Papers.
    6. Matthes, Christian & Schwartzman, Felipe, 2019. "What Do Sectoral Dynamics Tell Us About the Origins of Business Cycles?," Working Paper 19-9, Federal Reserve Bank of Richmond.
    7. Frank Smets & Joris Tielens & Jan Van Hove, 2018. "Pipeline Pressures and Sectoral Inflation Dynamics," Working Paper Research 351, National Bank of Belgium.
    8. Emiliano Brancaccio & Raffaele Giammetti & Milena Lopreite & Michelangelo Puliga, 2019. "Monetary Policy, Crisis and Capital Centralization in Corporate Ownership and Control Networks: a B-Var Analysis," LEM Papers Series 2019/28, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    9. repec:eee:moneco:v:102:y:2019:i:c:p:70-92 is not listed on IDEAS
    10. Dong, Feng & Wen, Yi, 2019. "Long and Plosser meet Bewley and Lucas," Journal of Monetary Economics, Elsevier, vol. 102(C), pages 70-92.
    11. Carvalho, Carlos & Nechio, Fernanda, 2018. "Approximating multisector New Keynesian models," Economics Letters, Elsevier, vol. 163(C), pages 193-196.

    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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