How do sectoral elasticities affect the transmission of monetary shocks?

PurposeThe presence of heterogeneity in price stickiness has been previously shown to be the main determinant of the real effects of nominal shocks. The paper presents theoretical results that highlight the significance of labor mobility and intratemporal elasticity of substitution across sectors.Design/methodology/approachThis paper explores output dynamics in a closed economy, relying on a New Keynesian model that accounts for heterogeneity in price stickiness across sectors.FindingsThe key finding from the analytical results is that changes in labor mobility and intratemporal elasticity of substitution across sectors have an equivalent impact on sectoral output when accounting for differences in price stickiness. The model is then calibrated for the US economy using data from the manufacturing and services sectors, providing validation for the analytical results.Originality/valueConventional models often assume either immediate labor reallocation across sectors following shocks or no labor mobility at all. Additionally, these models assume either strong complementarity in consumption or some degree of substitutability. This paper demonstrates the crucial role that labor reallocation and the elasticity of substitution across goods across sectors play in generating well-known economic outcomes.