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Sectoral price rigidity and aggregate dynamics

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  • Bouakez, Hafedh
  • Cardia, Emanuela
  • Ruge-Murcia, Francisco

Abstract

This paper studies the business cycle implications of sectoral heterogeneity in price rigidity using a highly disaggregated multi-sector model. The model is estimated by the Simulated Method of Moments using a mix of aggregate and sectoral U.S. data. The frequencies of price changes implied by our estimates are consistent with those reported in micro-based studies. We show that heterogeneity in price rigidity is the primary factor explaining the heterogeneity in the responses of sectoral output and inflation to a monetary policy shock. We also find that ignoring sectoral heterogeneity in price rigidity leads to the mismeasurement of the relative importance of aggregate and sector-specific shocks in aggregate and sectoral fluctuations.

Suggested Citation

  • Bouakez, Hafedh & Cardia, Emanuela & Ruge-Murcia, Francisco, 2014. "Sectoral price rigidity and aggregate dynamics," European Economic Review, Elsevier, vol. 65(C), pages 1-22.
    • Handle: RePEc:eee:eecrev:v:65:y:2014:i:c:p:1-22
    DOI: 10.1016/j.euroecorev.2013.09.009
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    More about this item

    Keywords

    Multi-sector models; Price stickiness; Simulated method of moments; Sectoral shocks; Monetary policy;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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