Heterogeneous response of disaggregate inflation to monetary policy regime change: The role of price stickiness |
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Authors: | Chi-Young Choi Róisín O'Sullivan |
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Institution: | 1. Federal Reserve Bank of San Francisco, United States;2. Department of Economics, University of California, Davis, United States;3. Department of Economics, University of Bonn, Germany;4. CEPR, United Kingdom;5. Graduate School of Management, University of California, Davis, United States;6. NBER, United States |
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Abstract: | This paper explores how a monetary regime change affects headline inflation via differential effects on various sectors in the economy. Using disaggregated CPI data for Canada, we find that the response to the adoption of inflation targeting (IT) was quite heterogeneous across sectors. While sticky-price sectors experienced a notable change in inflation dynamics following IT adoption, little structural change was observed in flexible price sectors. Our analysis based on a common factor model suggests that the structural changes in the sticky price sectors are driven by a decline in their responses to common aggregate shocks, including a monetary shock. |
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Keywords: | Price stickiness Sectoral inflation dynamics Monetary policy regime Inflation targeting (IT) Common factor model |
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