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.