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Price Rigidity and the Granular Origins of Aggregate Fluctuations

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  • Ernesto Pasten
  • Raphael Schoenle
  • Michael Weber

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.

Suggested Citation

  • Ernesto Pasten & Raphael Schoenle & Michael Weber, 2020. "Price Rigidity and the Granular Origins of Aggregate Fluctuations," Working Papers Central Bank of Chile 864, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:864
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_864.pdf
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    Cited by:

    1. Ariel Burstein & Basile Grassi & Vasco Carvalho, 2019. "Bottom-Up Markup Fluctuations," 2019 Meeting Papers 505, Society for Economic Dynamics.
    2. Damian Romero, 2022. "Market Incompleteness, Consumption Heterogeneity and Commodity Price Shocks," Working Papers Central Bank of Chile 950, Central Bank of Chile.
    3. Xavier Gabaix & Ralph S. J. Koijen, 2024. "Granular Instrumental Variables," Journal of Political Economy, University of Chicago Press, vol. 132(7), pages 2274-2303.
    4. Jennifer La'O & Alireza Tahbaz‐Salehi, 2022. "Optimal Monetary Policy in Production Networks," Econometrica, Econometric Society, vol. 90(3), pages 1295-1336, May.
    5. Luis Pedauga & Francisco Sáez & Blanca L. Delgado-Márquez, 2022. "Macroeconomic lockdown and SMEs: the impact of the COVID-19 pandemic in Spain," Small Business Economics, Springer, vol. 58(2), pages 665-688, February.
    6. Shang-Jin Wei & Yinxi Xie, 2022. "On the Wedge Between the PPI and CPI Inflation Indicators," Staff Working Papers 22-5, Bank of Canada.

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