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

Abstract

We study the role of heterogeneity in nominal price rigidity for aggregate fluctuations in a model with sectoral productivity shocks. Theoretically, sectoral heterogeneity in the pricing friction has an ambiguous effect on GDP and aggregate price volatility. Quantitatively, (i) GDP volatility is amplified when the friction is heterogeneous rather than homogeneous; (ii) sectoral shocks can jointly rationalize the volatility of sectoral prices, aggregate prices, and GDP, unlike aggregate shocks; and (iii) shocks to the largest or most central sectors may not matter in the aggregate as heterogeneous pricing frictions may alter the identity of the most important sectors for aggregate fluctuations.