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The Relative Price and Relative Productivity Channels for Aggregate Fluctuations
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Eric T Swanson
Published/Copyright:
October 20, 2006
Abstract
This paper demonstrates that sectoral heterogeneity itself, without additional bells or whistles, has important, first-order implications for the transmission of aggregate shocks to aggregate variables in an otherwise standard DSGE model. The effects of sectoral heterogeneity on this transmission are decomposed into two channels: a “relative price” channel and a “relative productivity” channel. The relative price channel results from changes in the relative prices of aggregates, such as investment vs. consumption, in response to a shock. The relative productivity channel arises from changes in the distribution of inputs across sectors. We show that, for standard multi-sector models, this latter channel is second-order, but becomes first-order if we consider a nontraded input such as capital utilization or introduce a wedge that thwarts the steady-state equalization of marginal products of a traded input across sectors. For reasonable parameterizations, the relative productivity channel causes aggregate productivity to vary procyclically in response to even non-technological shocks, such as changes in government purchases.
Keywords: sectoral heterogeneity; adjustment costs; DSGE models; amplification; propagation; procyclical productivity
Published Online: 2006-10-20
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Keywords for this article
sectoral heterogeneity;
adjustment costs;
DSGE models;
amplification;
propagation;
procyclical productivity
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- Frontiers Article
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- Advances Article
- Monetary Policy and Uncertainty about the Natural Unemployment Rate: Brainard-Style Conservatism versus Experimental Activism
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