The relative price effects of monetary shocks

We document the response of the individual components of the Producer Price Index (PPI) to commonly used measures of monetary shocks, and show that these responses are at variance with many widely used models of monetary nonneutrality. Monetary shocks are shown to have large relative price effects, resulting in an increase in the dispersion of the cross-section distribution of prices. Furthermore, in response to a contractionary (expansionary) monetary shock, a substantial number of prices tend to rise (fall). Most existing models of monetary nonneutrality are incapable of replicating these types of relative price responses.