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Changes in the effects of monetary policy on disaggregate price dynamics

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  • Baumeister, Christiane
  • Liu, Philip
  • Mumtaz, Haroon

Abstract

Based on a time-varying factor-augmented vector autoregression, we demonstrate that the propagation mechanism of monetary policy disturbances differs across disaggregate components of personal consumption expenditures. While many disaggregate prices rise temporarily in response to a monetary tightening in the early part of the sample, there is no evidence of a price puzzle at the aggregate level. The share of disaggregate prices that exhibit the price puzzle diminishes from the early 1980s onwards. There also is evidence of a substantial decline in the dispersion of disaggregate price responses over time. This gradual decrease in cross-sectional heterogeneity of disaggregate price responses is associated with a dampening effect on aggregate real economic activity and a stronger effect on the aggregate price level. We illustrate by means of a multi-sector sticky-price model augmented by a cost channel how key structural parameters would have had to change to match this evolution of sectoral price dynamics.

Suggested Citation

  • Baumeister, Christiane & Liu, Philip & Mumtaz, Haroon, 2013. "Changes in the effects of monetary policy on disaggregate price dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 543-560.
    • Handle: RePEc:eee:dyncon:v:37:y:2013:i:3:p:543-560
    DOI: 10.1016/j.jedc.2012.09.009
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    More about this item

    Keywords

    Structural FAVAR; Time variation; Monetary transmission; Disaggregate prices; Heterogeneous pricing decisions;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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