Production Networks and Supply-Side Effect of Monetary Policy-Peking University HSBC Business School(PHBS)

Production Networks and Supply-Side Effect of Monetary Policy

2023-11-23 09:44:02

This paper studies the supply-side effect of monetary policy in a multisector economy with input-output linkages. We derive a tractable sufficient statistic for the supply-side effect. The optimal monetary policy leads to an inflation bias due to both initial markups and the supply side effect, and stabilizes a price index by assigning greater weights to (i) larger industries, (ii) industries with stickier prices, and (iii) industries with lower initial markups. In a calibrated model, monetary policy has a strong impact on the supply side of the economy. Without production networks, the supply-side effect of monetary policy declines substantially.

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