Sectoral Heterogeneity in Nominal Price Rigidity and the Origin of Aggregate Fluctuations

Abstract

We derive conditions under which heterogeneity in nominal price rigidity amplifies the aggregate fluctuations from idiosyncratic shocks and demonstrate its quantitative implications: (1) GDP volatility from sectoral productivity shocks doubles when nominal price rigidity is heterogeneous rather than homogeneous; (2) sectoral productivity shocks can jointly rationalize the volatility of sectoral prices, aggregate prices, and GDP contrary to aggregate productivity shocks; (3) heterogeneity in nominal rigidity changes the sectors from which aggregate fluctuations originate. We also discuss implications for aggregate price dynamics and the role of alternative monetary policy rules.