Price Stickiness Asymmetry and Real Shocks Macroeconomic Dynamics

In a two-sector New-Keynesian economy exposed to real shocks, this paper shows that the dispersion in the degree of sectoral price stickiness plays a key role in the determination of the dynamics of aggregate inflation and, consequently, of the whole economy. Increasing the dispersion in price stickiness reduces the persistence of inflation and, to a smaller extent, of the interest rate. It also reduces the volatility of inflation, the interest rate and the output-gap. Thus two economies with the same average degree of sectoral price stickiness but unlike variance may behave very differently. In particular, they can require monetary policies that differ in terms of tightness and/or easiness of a factor ranging between 50% and 150% over the first ten quarters. Generally, disregarding the dispersion in sectoral price stickiness leads policymakers to overvalue the volatility and persistence of inflation (output gap) with any (real) shocks, and to undervalue the volatility and persistence of the output gap with monetary shocks