Price Rigidity and the Granular Origins of Aggregate Fluctuations

We study the potency of sectoral productivity shocks to drive aggregate fluctuations in the presence of three empirically relevant heterogeneities across sectors: sector size, intermediate input consumption, and pricing frictions in a multi-sector New Keynesian model. We derive conditions under which sectoral shocks matter for aggregate volatility and show the distribution of sector size or input-output linkages are neither necessary nor sufficient to generate aggregate fluctuations. Quantitatively, we calibrate our full model to 341 sectors using US data and find (1) heterogeneous price rigidity across sectors doubles the aggregate volatility from sectoral shocks relative to a calibration with homogeneous price rigidity; 2) realistically calibrated sectoral productivity shocks are key to generating sizable aggregate fluctuations of both GDP and prices; 3) heterogeneity of price rigidity matters for aggregate fluctuations because it changes the effective distribution of sector size and network centrality; 4) plausibly sized aggregate technology shocks cannot generate sizeable volatility in the presence of price rigidity; and 5) sectoral shocks generate large aggregate fluctuations under different empirically plausible monetary policy rules