Monetary policy and production networks: an empirical investigation

Ghassibe, Mishel

doi:10.1016/j.jmoneco.2021.02.002

Cited by 25 publications

(16 citation statements)

References 22 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…In a series of recent papers, Pastén, Schoenle, and Weber (2020a, 2020b), Ozdagli and Weber (2021), and Ghassibe (2021) study the production network's role as a possible transmission mechanism of monetary policy shocks 5 . We differ from these papers by providing a closed‐form characterization of the optimal monetary policy as a function of the economy's underlying production network and the extent of nominal rigidities.…”

Section: Introductionmentioning

confidence: 99%

Optimal Monetary Policy in Production Networks

La’O

Tahbaz-Salehi

2022

ECTA

View full text Add to dashboard Cite

This paper studies the optimal conduct of monetary policy in a multisector economy in which firms buy and sell intermediate goods over a production network. We first provide a necessary and sufficient condition for the monetary policy's ability to implement flexible‐price equilibria in the presence of nominal rigidities and show that, generically, no monetary policy can implement the first‐best allocation. We then characterize the optimal policy in terms of the economy's production network and the extent and nature of nominal rigidities. Our characterization result yields general principles for the optimal conduct of monetary policy in the presence of input‐output linkages: it establishes that optimal policy stabilizes a price index with greater weights assigned to larger, stickier, and more upstream industries, as well as industries with less sticky upstream suppliers but stickier downstream customers. In a calibrated version of the model, we find that implementing the optimal policy can result in quantitatively meaningful welfare gains.

show abstract

Section: Introductionmentioning

confidence: 99%

Optimal Monetary Policy in Production Networks

La’O

Tahbaz-Salehi

2022

ECTA

View full text Add to dashboard Cite

show abstract

“…Industries with a higher degree of price stickiness should systematically react more strongly to monetary policy shocks (ceteris paribus). This prediction is made by various multi-sector New Keynesian models, for example Bouakez, Cardia, and Ruge-Marcia (2013) and Ghassibe (2018), but can also arise from multisector menu cost models like for example Nakamura and Steinsson (2010). Testing this prediction does not only speak to multi-sector New Keynesian models, but more generally to New Keynesian models of the monetary transmission mechanism.…”

Section: Resultsmentioning

confidence: 99%

“…The fact that a substantial share of industries increase their output in response to contractionary monetary policy shocks deserves mentioning. In the multi-sector New Keynesian models of Ghassibe (2018) and Bouakez, Cardia, and Ruge-Marcia (2013), sectoral output responses are all negative in response to contractionary monetary shocks. In an extension of his model, Ghassibe (2018) shows that positive output reactions to a contractionary policy shock are only possible under an elasticity of substitution between sectors that is greater than one.…”

Section: Resultsmentioning

confidence: 99%

“…In the multi-sector New Keynesian models of Ghassibe (2018) and Bouakez, Cardia, and Ruge-Marcia (2013), sectoral output responses are all negative in response to contractionary monetary shocks. In an extension of his model, Ghassibe (2018) shows that positive output reactions to a contractionary policy shock are only possible under an elasticity of substitution between sectors that is greater than one. The fact that a non-negligible share of sectors increases output after a contractionary policy shock is hence not consistent with the most basic versions of multi-sector New Keynesian models.…”

Section: Resultsmentioning

confidence: 99%

“…In these types of models, industries with a higher degree of price stickiness (ceteris paribus) react more strongly to monetary policy shocks (see e.g. Bouakez, Cardia, and Ruge-Marcia (2013) and Ghassibe (2018)). This nding is not limited to models that use nominal price rigidities modeled as in Calvo (1983), but can also be extended to multi-sector menu cost models.…”

Section: Non-technical Summarymentioning

confidence: 99%

See 2 more Smart Citations