Services deepening and the transmission of monetary policy

Alessandro Galesi, Omar Rachedi

Research output: Indexed journal article Articlepeer-review

12 Citations (Scopus)
14 Downloads (Pure)


The structural transformation from manufacturing to services comes with a process of services deepening: the services share of intermediate inputs rises over time. Moreover, inflation reacts less to monetary policy shocks in countries that are more intensive in services intermediates. We rationalize these facts using a two-sector New Keynesian model where trends in sectoral productivities generate endogenous variations in the Input–Output matrix. Services deepening reduces the contemporaneous response of inflation to monetary policy shocks through a marginal cost channel. Since services prices are stickier than manufacturing prices, the rise of services intermediates raises the sluggishness of sectoral marginal costs and inflation rates.

Original languageEnglish
Pages (from-to)1261-1293
Number of pages33
JournalJournal of the European Economic Association
Issue number4
Publication statusPublished - 1 Aug 2019
Externally publishedYes


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