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Effects of monetary policy shocks across time and across sectors

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Abstract

Recent empirical research by Olivei and Tenreyro (2007) demonstrates that the effect of monetary policy shocks on output and prices depends on the shock's timing: In the United States, a monetary policy shock that takes place in the first half of the year has a larger effect on output than on prices, while the opposite is true in the second half of the year. Olivei and Tenreyro argue that this finding reflects the fact that a greater fraction of wage rates are re-contracted in the second half of the year, implying that wages (and prices) are less flexible in the first half. In this paper, I assess this explanation in light of several additional empirical results. Most importantly, I demonstrate that within-year differences in the responses of output and prices following a monetary policy shock are not more pronounced in the service-producing sector, where labor costs represent a larger fraction of total production costs. I also find that movements in prices following a monetary shock tend to lead wage changes. These and other empirical results suggest that something other than uneven wage adjustment might be responsible for the differential within-year effect of monetary policy shocks that Olivei and Tenreyro document.

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  • Ekaterina V. Peneva, 2013. "Effects of monetary policy shocks across time and across sectors," Finance and Economics Discussion Series 2013-70, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2013-70
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    1. Giovanni Olivei & Silvana Tenreyro, 2007. "The Timing of Monetary Policy Shocks," American Economic Review, American Economic Association, vol. 97(3), pages 636-663, June.
    2. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148, Elsevier.
    3. Klenow, Peter J. & Malin, Benjamin A., 2010. "Microeconomic Evidence on Price-Setting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284, Elsevier.
    4. Olivei, Giovanni & Tenreyro, Silvana, 2010. "Wage-setting patterns and monetary policy: International evidence," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 785-802, October.
    5. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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    1. Rosenberg, Signe, 2019. "The effects of conventional and unconventional monetary policy on house prices in the Scandinavian countries," Journal of Housing Economics, Elsevier, vol. 46(C).

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