Industrial Transformation, Heterogeneity in Price Stickiness, and the Great Moderation

Since the '80s the volatility of output growth and inflation experienced by several industrialized countries has remarkably declined, what has been dubbed the "Great Moderation". Various explanations have been proposed and likely all play some role. This paper shows that when an industrial transformation reduces the weight of the manufacturing sector relative to the services sector, the presence of sectoral heterogeneity in price stickiness leads to a significant decline in the volatility of inflation and output growth.