The relative price effects of monetary shocks

Abstract

We document the response of the individual components of the Producer Price Index (PPI) to commonly used measures of monetary shocks, and show that these responses are at variance with many widely-used "macro" models of monetary nonneutrality. Monetary shocks are shown to have large relative price effects, resulting in an increase in the dispersion of the cross-section distribution of prices. Furthermore, in response to a contractionary (expansionary) monetary shock, a substantial number of prices tend to rise (fall). Most of the existing models of monetary nonneutrality are not capable of replicating these types of relative price responses.

Sectoral Price Facts in a Sticky-Price Model

“…Thus, despite the frequency of price changes being exogenous and independent of the nature of the shock, to the extent that those endogenous variables exhibit di¤erential responses to di¤erent shocks, so do sectoral prices. 3 We identify three departures from the aforementioned …rst-pass speci…cation which deliver en- 2 Similar points have been made elsewhere in the literature. For example, when writing about the Calvo (1983) model of price setting, Maćkowiak and Smets (2009) conjecture that "If the frequency of price changes were decisive for impulse responses, one would expect prices to respond with roughly equal speed to both kinds of shocks".…”

“…Regarding menu-cost models, Maćkowiak et al (2009) argue that "when …rms respond quickly to sector-speci…c shocks and sector-speci…c shocks hit frequently, then …rms also respond quickly to aggregate shocks." 3 The last statement is somewhat circular -this is inherent in general equilibrium models. The reason why pricing interactions can produce di¤erential responses to shocks will become clear subsequently.…”

Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data

“…In addition, while aggregate inflation is often argued to be persistent over long samples, 4 disaggregated series appear much more transient. Several authors have argued that the apparent persistence of aggregate inflation may reflect an aggregation bias or a structural break in the mean inflation during the sample.…”

“…It also permits a decomposition of the persistence in inflation in terms of macroeconomic and sector-specific factors. 4 See, e.g., Fuhrer and Moore (1995), Gali and Gertler (1999), Sargent (2001, 2003), Sims (2001), Stock (2001), Pivetta and Reis (2003), Levin and Piger (2003), Clark (2003). 5 Pesaran and Smith (1995) and Imbs, Mumtaz, Ravn and Rey (2005) argue that heterogeneity -across categories -in the persistence individual series may result in a large estimated persistence of the aggregate even if individual series display on average little persistence.…”

Evidence on the effects of inflation on price dispersion under indexation

“…Another approach in the literature consists of using impulse-response analysis in VAR systems that include individual commodity prices to measure the impact of monetary policy shocks on the cross-sectional distribution of prices, see Bils, Klenow, and Kryvtsov (2003), Lastrapes (2006), or Balke and Wynne (2007). This multi-price VAR approach is a useful and promising alternative approach to the single-equation analysis of the standard RPV literature.…”