2022
DOI: 10.3982/ecta18627
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Optimal Monetary Policy in Production Networks

Abstract: 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 n… Show more

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Cited by 51 publications
(24 citation statements)
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References 88 publications
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“…Our paper is also related to a growing literature on network games with incomplete information (Bergemann, Heumann, and Morris, 2017;Auclert, Rognlie, and Straub, 2020;Lian, 2021), especially in the context of input-output networks (Atolia and Chahrour, 2020;La'O and Tahbaz-Salehi, 2022). Closest to our work is the recent contribution by Chahrour, Nimark, and Pitschner (2021), that develops a framework with information frictions in a closed-economy production network, and shows that variations in news coverage can synchronize sectors' responses and amplify aggregate fluctuations.…”
Section: Empiricsmentioning
confidence: 84%
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“…Our paper is also related to a growing literature on network games with incomplete information (Bergemann, Heumann, and Morris, 2017;Auclert, Rognlie, and Straub, 2020;Lian, 2021), especially in the context of input-output networks (Atolia and Chahrour, 2020;La'O and Tahbaz-Salehi, 2022). Closest to our work is the recent contribution by Chahrour, Nimark, and Pitschner (2021), that develops a framework with information frictions in a closed-economy production network, and shows that variations in news coverage can synchronize sectors' responses and amplify aggregate fluctuations.…”
Section: Empiricsmentioning
confidence: 84%
“…Our paper connects international news coverage data with data on expectations, quantifies the role of noise shocks in international business cycle fluctuations, and explores the interaction between the production network and incomplete information in shaping shock propagation. The feature that the equilibrium outcome is shaped jointly by the network structure and information frictions resembles that in La'O and Tahbaz-Salehi (2022). That paper focuses on the optimal monetary policy implications in a closed economy and does not study the differential impacts of private vs. public signals.…”
Section: Empiricsmentioning
confidence: 99%
“…Relative to this literature, our paper is the first (to our knowledge) to analyze occasionally binding capacity constraints in the supply chain, within a complete DSGE model. In this, our paper extends the new literature on monetary policy in economies with production networks [Ozdagli and Weber (2021);La'o and Tahbaz-Salehi (2022)] to accommodate supply chain constraints. Thus, prior work on capital utilization [Greenwood, Hercowitz and Huffman;Cooley, Hansen and Prescott (1995); Gilchrist and Williams (2000)], which we discuss further below.…”
mentioning
confidence: 82%
“…Unlike many canonical macronetwork models, our framework allows for firm profits, which drive stock returns. To generate monetary nonneutrality, we assume preset wages and allow money to be introduced in different ways, for instance, via cash‐in‐advance constraints, as in many recent macronetwork models (La'O and Tahbaz‐Salehi (2020), Ozdagli and Weber (2017), Rubbo (2022)).…”
mentioning
confidence: 99%
“…(2012), Atalay (2017), Grassi (2017), Baqaee and Farhi (2019a)). Pasten, Schoenle, and Weber (2020) study the transmission of monetary policy in a production economy, while recent theoretical work on optimal monetary policy examines the impact of IO linkages on policy setting in a closed economy (La'O and Tahbaz‐Salehi (2020), Rubbo (2022)), as well as in a small open‐economy setting (Wei and Xie (2020)). Ozdagli and Weber (2017), to which our paper is most closely related, shows that IO linkages are quantitatively important for monetary policy transmission to stock returns in the United States, while Herskovic (2018) and Richmond (2019) nest IO structures into standard asset pricing models.…”
mentioning
confidence: 99%