Sectoral Price Rigidity and Aggregate Dynamics

Abstract

In this paper, we study the macroeconomic implications of sectoral heterogeneity and, in particular, heterogeneity in price setting, through the lens of a highly disaggregated multisector model. The model incorporates several realistic features and is estimated using a mix of aggregate and sectoral U.S. data. The frequencies of price changes implied by our estimates are remarkably consistent with those reported in micro-based studies, especially for non-sale prices. The model is used to study (i) the contribution of sectoral characteristics to the observed cross sectional heterogeneity in sectoral output and in ‡ation responses to a monetary policy shock, (ii) the implications of sectoral price rigidity for aggregate output and in ‡ation dynamics and for cost pass-through, and (iii) the role of sectoral shocks in explaining sectoral prices and quantities.JEL Classi…cation: E3, E4, E5

CONDI: A Cost-of-Nominal-Distortions Index

“…11 The resulting CDF is labeled "CPI -with PCE weights" in Figure 1. The implied median frequency of price change is 8.3 percent.…”

Regional & Multi-Sector Input-Output Model for the Czech Republic

“…This representation assimilates the study of Bouakez (2005Bouakez ( , 2009). Given these definitions, one may derive:…”

“…This model abstracts from the government sector for the purpose of simpliciation. The main influential studies motivating the input-output research of the DSGE model compose of the study of Bergin and Feenstra (2000) and the papers Bouakez et al (2009Bouakez et al ( , 2014.…”

“…  (6) where z u is the steady-state growth rate of technology. The shock thus follows the autoregressive process with an IID-Normal error term.…”

Factor Analysis of a Large Dsge Model

“…We pursue this approach because, in contrast to actual economic data, whose generating process is unknown, the artificial data from a model come from a process that is known and under the control of the econometrician. As DSGE model we use the highly disaggregated multi-sector model developed and estimated by Bouakez et al (2009). Several features of this model make it particularly suitable for our analysis.…”