Monetary policy shocks and price stickiness: an analysis of price and output responses to policy in manufacturing industries

This paper uses annual data on 450 SIC four-digit manufacturing industries obtained from the NBER Manufacturing Productivity Database to examine how manufacturing industries respond to unanticipated changes in the federal funds rate. The analysis proceeds in three stages. First, industry price and output responses to unanticipated changes in the federal funds rate are examined. Second, the effect of industry characteristics on these responses is analyzed. Finally, the paper assesses whether particular industry characteristics are associated with price rigidity or interest rate sensitivity. The results in this paper support the following conclusions. Durable good industries exhibit larger price and output responses to federal funds rate shocks than nondurable good industries. This suggests that durable good industries are more sensitive to interest rate shocks than nondurable good industries and is consistent with the observation that durable good industries are more cyclical than nondurable good industries. High concentration industries are found to exhibit smaller price responses and larger output responses to unanticipated changes in the federal funds rate than low concentration industries. Thus, price rigidity may be an important determinant of how high concentration industries respond to federal fund rate shocks. Industries with high inventory-to-sales ratios are associated with smaller price and output responses to interest rate shocks than industries with low inventory-to-sales ratios. This suggests that industries whose output is storable are able to smooth price and output responses to demand shocks through inventory adjustment.