Heterogeneity in sectoral price and quantity responses to shocks to monetary policy

Abstract

This paper investigates the sectoral price and quantity responses to an exogenous interest rate shock in the United States. It has two main findings. First, an interest rate shock causes strong relative price effects in a non-negligible number of sectors whose price responses to the shock differ broadly from those of the aggregate. More importantly, such effects are present even four years after the shock. Second, sectoral differences in the frequency of price changes are only weakly associated with the sectoral price and quantity responses. We show that a multi-sector model equipped with a working-capital channel, sticky wages, and sectoral heterogeneity in the frequency of price changes and the structure of production costs can explain these two findings. © 2022 Elsevier Inc.