Working Paper: NBER ID: w21599
Authors: Louis Phaneuf; Eric R. Sims; Jean Gardy Victor
Abstract: We formulate a medium-scale DSGE model that emphasizes a strong interplay between a roundabout production structure and a working capital channel that requires firms to borrow funds to finance the costs of all their variable inputs and not just the wage bill. Despite an absence of backward-looking price and wage indexation, our model is able to account for (i) a persistent and hump-shaped response of inflation to a monetary policy shock, (ii) a large and persistent response of output to a monetary policy shock, (iii) a mild "price puzzle," (iv) a procyclical price markup conditional on a monetary shock, (v) non-inertial responses of inflation to non-monetary shocks, and (vi) a negative unconditional autocorrelation of the first difference of inflation that is consistent with the data. A medium-scale model relying on backward indexation of wages and prices to past inflation fails along several of these dimensions.
Keywords: DSGE model; inflation; monetary policy; working capital; price markup
JEL Codes: E00; E1; E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary policy shocks (E39) | inflation (E31) |
| working capital channel (D25) | inflation (E31) |
| roundabout production (D20) | inflation (E31) |
| monetary policy shocks (E39) | output (C67) |
| monetary policy shocks (E39) | price markup (D49) |
| price puzzle (D41) | inflation (E31) |