Sectoral price rigidity and aggregate dynamics

- Estimate a highly disaggregated multi-sector model with heterogeneous price rigidity.
- Heterogeneity in price rigidity explains the differences in sectoral inflation responses to a monetary policy shock.
- It has critical implications regarding the relative importance of the various shocks for aggregate fluctuations.

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.