Endogenous production networks and non-linear monetary transmission

Ghassibe, Mishel

Endogenous production networks and non-linear monetary transmission

Citation

Ghassibe, M. Endogenous production networks and non-linear monetary transmission. 2024. handle: http://hdl.handle.net/10230/60292

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Abstract

I develop a tractable dynamic sticky-price model, where input-output linkages are formed endogenously. The model delivers cyclical properties of networks that are consistent with those I estimate using sectoral and firm-level data, conditional on identified real and nominal shocks. A novel source of state dependence in nominal rigidities arises: the strength of complementarities in price setting and monetary non-neutrality increase in the number of suppliers optimally chosen by firms. As a result, the model simultaneously rationalizes the following observed non-linearities in monetary transmission. First, there is cycle dependence: the magnitude of real GDP’s response to a monetary shock is procyclical. Second, there is path dependence: non-neutrality of real GDP is higher following previous periods of loose monetary policy. Third, there is size dependence: larger monetary contractions shrink the network and generate a less than proportional decrease in GDP relative to smaller contractions.