The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy

Pasten, Ernesto; Schoenle, Raphael; Weber, Michael

doi:10.26509/frbc-wp-201925r

Working Paper Revision

The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy

Abstract: Realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages in the transmission of monetary policy shocks. Quantitatively, heterogeneity in price stickiness is the central driver for real effects. Input-output linkages and consumption shares alter the identity of the most important sectors to the transmission. 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 ignoring heterogeneous consumption shares and input-output linkages identifies the wrong sectors from which the real effects originate.

Keywords: multi-sector Calvo model; monetary policy; input-output linkages;

JEL Classification: E31; E32; O40;

https://doi.org/10.26509/frbc-wp-201925r