Three essays on heterogeneity in sectoral price flexibility

Abstract

This thesis focuses on the heterogeneity of price flexibility among sectors. For instance, does a multi-sector model in which the frequency of price changes differs among sectors predict radically different dynamics for aggregate variables following a monetary policy shock than a one-sector model in which sectors are assumed to be homogenous in their frequencies of price changes? Is there any relative price effect of the shocks to monetary policy in the United States? If there is, can this relative price effect be related to the heterogeneity of the frequency of price changes among sectors? What insights can be gained if dynamic stochastic open-economy models are elaborated by including the heterogeneity of price flexibility among sectors? These questions are among the types of the questions that I address in this thesis. This thesis consists of three papers. The first paper studies the effects of a monetary policy shock on output, inflation and the real wage in the United States. Next, the dynamics of these aggregate variables as predicted by the one- and multi-sector dynamic stochastic general equilibrium (DSGE) models are compared. The main finding is that the dynamics predicted by the multi-sector model are quite similar to those predicted by the one-sector model. The second paper focuses mostly on the effects of shocks to the federal funds rate on disaggregated sectors' prices in the United States. The two main empirical findings in this chapter are the substantial heterogeneity in sectoral price responses to these shocks and that the price responses in sectors are only weakly associated with their frequency of price changes. The third paper, jointly written with Emek Karaca, is concerned with the effects of positive monetary shocks on output, the real exchange rate and the price level in developing countries which have adopted an inflation targeting regime. We find that such shocks are associated with a temporary rise in output; a temporary depreciation in the real exchange rate and a sizable contemporaneous increase in the price level in those economies.