Production Networks and the Propagation of Monetary Policy Shocks (with Ernesto Pasten and Michael Weber)

Abstract:
We develop a multi-sector Calvo model with intermediate inputs to study the quantitative importance of heterogeneities in price rigidities, sector size, and input-output linkages and their interaction for the real effects of monetary policy shocks. We show theoretically real effects are bigger if the share of intermediate inputs is high or if sticky-price sectors are important suppliers to the rest of the economy, to flexible-price sectors, or to large sectors. Quantitatively, heterogeneity in input-output linkages contributes only marginally to the real effects of monetary policy shocks, whereas heterogeneity in the frequency of price adjustment creates large real effects of nominal shocks. Differences in consumption shares have an economically important effect on the total real effects. To reach those conclusions, we calibrate a 350-sector version of the model to the input-output tables from the Bureau of Economic Analysis and the micro-data underlying the producer price index from the Bureau of Labor Statistics to reach those conclusions. A less granular calibration with only 58 sectors understates the real effects of monetary policy by 25%, with a similar impact response of inflation. The large real effects reflect heterogeneity in price markups due to the different heterogeneities and a higher average level of markups, fully driven by the product market wedge.