Price Setting in a Model with Production Chains: Evidence from Sectoral Data

March 1, 2010

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Format: Chicago

Maral Shamloo. Price Setting in a Model with Production Chains: Evidence from Sectoral Data, (USA: International Monetary Fund, 2010) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Reconciling the high frequency of price changes at the micro level and their apparent rigidity at the aggregate level has been the subject of considerable debate in macroeconomics recently. In this paper I show that incorporating production chains in a standard New- Keynesian model replicates two stylized facts about the data. First, sectoral prices respond with significantly different speeds to aggregate shocks. Meanwhile, the responses to sectorspecific shocks are similar. Second, the standard price setting models are unable to quantitatively match the amount of monetary non-neutrality observed in the data. I argue, First, that the input-output linkages in production generate different responses to aggregate shocks across sectors. Second, calibrating this model to the US data can create five times more monetary non-neutrality in response to nominal shocks compared to an equivalent homogeneous economy with intermediate inputs. Finally, the model implies that upstream industries respond faster to aggregate shocks compared to downstream industries. I show that this prediction is supported by the data.

Subject: Consumption, Oil prices, Price adjustments, Sticky prices, Supply shocks

Keywords: Monetary policy, WP

Publication Details

Pages:

50
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/082
Stock No:

WPIEA2010082
ISBN:

9781451982664
ISSN:

1018-5941

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