Price Rigidity and the Granular Origins of Aggregate Fluctuations

Ernesto Pasten, Raphael Schoenle and Michael Weber

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: We study the potency of sectoral productivity shocks to drive aggregate fluctuations in the presence of three empirically relevant heterogeneities across sectors: sector size, intermediate input consumption, and pricing frictions in a multi-sector New Keynesian model. We derive conditions under which sectoral shocks matter for aggregate volatility in a simplified model and find the distribution of sector size or input-output linkages are neither necessary nor sufficient to generate aggregate fluctuations. Quantitatively, we calibrate our full model to 341 sectors using U.S. data and find (1) fully heterogeneous price rigidity across sectors doubles the aggregate volatility from sectoral shocks relative to a calibration with homogeneous price rigidity; 2) realistically calibrated sectoral productivity shocks are key to generating sizable aggregate fluctuations of both GDP and prices; 3) heterogeneity of price rigidity matters because it changes the effective distribution of sector size and network centrality. Our quantitative exercise generates large aggregate fluctuations under different empirically plausible monetary policy rules.

Date: 2020-01
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:864

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