Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/306710 
Year of Publication: 
2024
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2024-42
Publisher: 
Bank of Canada, Ottawa
Abstract: 
Large swings in the expenditure shares of goods and services at the start of the pandemic have contributed to the inflation surge, posing new challenges for monetary policy. Using a multi-sector model featuring upward labor adjustment frictions, we analyze the transmission of monetary policy during a demand reallocation episode, focussing on sectoral heterogeneity in inflation and output responses. Following an unexpected contractionary monetary policy shock, (constrained) expanding sectors respond primarily by lowering prices, while (unconstrained) contracting sectors reduce output more significantly. At the aggregate level, monetary policy is thus more effective at curbing inflation when a larger proportion of sectors are expanding or expected to be expanding in the near future.
Subjects: 
Domestic demand and components
Inflation and prices
Monetary policy transmission
JEL: 
E52
E31
E24
E12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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