The price effects of monetary shocks in a network economy

Journal article: Empirical evidence shows monetary shocks have two temporary effects on the distribution of prices. One, the dispersion of cross-section of prices increases in response to monetary shocks. Two, some prices change in the ‘wrong’ direction: some prices decrease in response to positive monetary shocks, and increase in response to negative monetary shocks. We present a model that generates the two effects of monetary shocks on the distribution of prices as an out-of-equilibrium phenomena. Firms are related to each other through a production network. Monetary shocks change the working capital of a subset of firms and percolate to other firms through buyer-seller linkages. Price dispersion increases because the percolation of a monetary shock through the production network causes prices to differentially deviate from their steady state values. Some prices change in the wrong direction because a shift in one firm’s demand causes a shift in another firm’s supply (and vice-versa), thereby generating complicated chains of bi-directional price changes. Monetary shocks can significantly disturb relative prices even when all prices are fully flexible.

Author(s)

Antoine Mandel, Davoud Taghawi-Nejad, Vipin Veetil

Journal
  • Journal of Economic Behavior and Organization
Date of publication
  • 2019
Keywords JEL
C63 C67 D80 E31 E52
Keywords
  • Prices
  • Money
  • Networks
  • Monetary shocks
  • Agent-based model
  • Out-of-equilibrium dynamics
Pages
  • 300-316
Version
  • 1
Volume
  • 164