Production Networks and the Propaga tion of Monetary Policy Shocks (with Ernesto Pasten and Michael We ber)
Abstract:
We develop a multi-
sector Calvo model with intermediate inputs to study the quantitative impor
tance of heterogeneities in price rigidities, sector size, and input-output
linkages and their interaction for the real effects of monetary policy sho
cks. We show theoretically real effects are bigger if the share of intermed
iate inputs is high or if sticky-price sectors are important suppliers to t
he rest of the economy, to flexible-price sectors, or to large sectors. Qua
ntitatively, heterogeneity in input-output linkages contributes only margin
ally to the real effects of monetary policy shocks, whereas heterogeneity i
n the frequency of price adjustment creates large real effects of nominal s
hocks. Differences in consumption shares have an economically important eff
ect on the total real effects. To reach those conclusions, we calibrate a 3
50-sector version of the model to the input-output tables from the Bureau o
f Economic Analysis and the micro-data underlying the producer price index
from the Bureau of Labor Statistics to reach those conclusions. A less gran
ular calibration with only 58 sectors understates the real effects of monet
ary policy by 25%, with a similar impact response of inflation. The large r
eal effects reflect heterogeneity in price markups due to the different het
erogeneities and a higher average level of markups, fully driven by the pro
duct market wedge.