A BEJM Contributions article.

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.

Submitted: January 27, 2005 · Accepted: July 24, 2006 · Published: October 20, 2006

Originally published in Contributions to Macroeconomics.

Recommended Citation

Swanson, Eric T. (2006) "The Relative Price and Relative Productivity Channels for Aggregate Fluctuations," Contributions to Macroeconomics: Vol. 6 : Iss. 1, Article 10.
Available at: http://www.bepress.com/bejm/contributions/vol6/iss1/art10