The Relative Price and Relative Productivity Channels for Aggregate Fluctuations

FRB of San Francisco Working Paper No. 2006-20

40 Pages Posted: 26 Jul 2007

See all articles by Eric T. Swanson

Eric T. Swanson

University of California, Irvine - Department of Economics

Date Written: June 2006

Abstract

This paper demonstrates that sectoral heterogeneity itself - without any additional bells or whistles - has 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 vis-a-vis consumption goods, which occurs in a sectoral model in response to even standard aggregate shocks. The relative productivity channel arises from changes in the distribution of inputs across sectors. We show that, for standard sectoral 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 non-technological shocks such as changes in government purchases.

JEL Classification: E32, E37, O47

Suggested Citation

Swanson, Eric T., The Relative Price and Relative Productivity Channels for Aggregate Fluctuations (June 2006). FRB of San Francisco Working Paper No. 2006-20, Available at SSRN: https://ssrn.com/abstract=1003057 or http://dx.doi.org/10.2139/ssrn.1003057

Eric T. Swanson (Contact Author)

University of California, Irvine - Department of Economics ( email )

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