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The Relative Price and Relative Productivity Channels for Aggregate Fluctuations
1Federal Reserve Bank of San Francisco, email@example.com
Citation Information: Contributions in Macroeconomics. Volume 6, Issue 1, Pages –, ISSN (Online) 1534-6005, DOI: 10.2202/1534-6005.1293, October 2006
- Published Online:
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.