Structural Transformation, Services Deepening, and the Transmission of Monetary Policy
47 Pages Posted: 28 Jul 2016
Date Written: July 28, 2016
Advanced economies are undergoing a structural transformation from manufacturing to services. We document that structural change comes with a process of services deepening: over time, both services and manufacturing become more intensive in service inputs. We argue that structural transformation and services deepening affect the transmission of monetary policy by increasing the relative importance of services, which have stickier prices than manufacturing. We study the implications of the U.S. sectoral reallocation with a New Keynesian model with two sectors connected by an input-output matrix, which varies endogenously over time. The rise of services dampens the responses of aggregate and sectoral inflation rates to a monetary policy shock. The changes in the responses of sectoral inflation rates are entirely driven by services deepening.
Keywords: New Keynesian model, intermediate inputs, input-output matrix
JEL Classification: E31, E43, E52, O41
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