Do Multisectoral New Keynesian Models Match Sectoral Data? 
Recent papers studying the consequences of introducing production networks and sectoral heterogeneity into macroeconomic models with nominal rigidities show that adding these features to an otherwise standard New Keynesian model has important consequences for the sources of macroeconomic fluctuations and for the effectiveness and design of stabilization policies. While those papers’ analyses are mostly theoretical, several recent studies assess the empirical properties of this class of models. These studies mostly focus on the aggregate properties of the multisectoral models and emphasize that production networks and producer heterogeneity can significantly amplify the effects of macroeconomic shocks or that sectoral shocks can contribute to aggregate fluctuations. This paper instead looks at how well multisectoral New Keynesian models can match some empirical properties of sectoral prices and quantities. The authors focus on higher moments of the inflation and consumption growth distributions and on the contemporaneous comovement of these two variables.
Key Findings
- During the full sample period (1983 through 2021), sectoral inflation exhibits negative contemporaneous comovement with consumption growth, which can be consistent with the prevalence of supply shocks over demand shocks on the whole. This negative comovement depends on the economic environment, but it appears quite robust across the historical episodes considered.
- The workhorse multisectoral New Keynesian model generates distributions of sectoral inflation and consumption growth that lack the asymmetry observed in the data and have a significantly lower kurtosis. Moreover, the model struggles to generate a consistently negative comovement of inflation and consumption growth.
- The sectoral dynamics engendered by aggregate shocks appear to be significantly different from those observed in the data. Yet, sectoral shocks with features such as high price stickiness and low shock persistence can potentially generate asymmetries, kurtosis, and negative inflation–consumption comovement.
Implications
The paper’s results suggest that while workhorse multisectoral models achieve success among many dimensions, they may still need some improvement to better match the properties of sectoral inflation and consumption distributions. These additional ingredients can significantly affect the estimated contribution of sectoral shocks to fluctuations in aggregate prices and quantities.
Abstract
We document empirical regularities of disaggregated inflation and consumption and study whether multisectoral New Keynesian models can explain them. We focus on higher moments of the inflation and consumption growth distributions as well as on the contemporaneous comovement of these two variables. We find that the sectoral distributions of inflation and consumption growth are asymmetric, with inflation skewed negatively and consumption growth positively. Both distributions are highly leptokurtic. In the full sample, from the mid-1980s through 2021, sectoral inflation and consumption growth overall correlate negatively, indicating the prevalence of supply shocks over demand shocks. The negative correlation is robust across historical episodes during this period, except during the COVID-19 pandemic, when inflation and consumption growth comoved positively. While the baseline model can match some of these facts for a specific shock process, in its baseline setup the model struggles to match them simultaneously.