Abstract
Large swings in the expenditure shares of goods and services at the start of the pandemic have contributed to the inflation surge, posing new challenges for monetary policy. Using a multisector model featuring upward labor adjustment frictions, we analyze the transmission of monetary policy during a demand reallocation episode, focusing on sectoral heterogeneity in inflation and output responses. Following an unexpected contractionary monetary policy shock, expanding sectors primarily respond by lowering prices, while contracting sectors reduce output more significantly. At the aggregate level, monetary policy is thus more effective at curbing inflation when a larger proportion of sectors are expanding or expected to be expanding in the near future.
Authors
- Julien Bengui
- Lu Han
- Gaelan MacKenzie
JEL codes
- E31
- E52