Working Paper: NBER ID: w28345
Authors: David Baqaee; Emmanuel Farhi; Kunal Sangani
Abstract: We propose a supply-side channel for the transmission of monetary policy. We show that in an economy with heterogeneous firms and endogenous markups, demand shocks such as monetary shocks have a first-order effect on aggregate productivity. If high-markup firms have lower pass-throughs than low-markup firms, as is consistent with empirical evidence, then a monetary easing reallocates resources to high-markup firms and alleviates misallocation. Consequently, positive “demand shocks” are accompanied by endogenous positive “supply shocks” that raise output and productivity, lower inflation, and flatten the Phillips curve. We derive a tractable four-equation dynamic model and use it to show that monetary shocks generate a procyclical hump-shaped response in TFP and endogenous cost-push shocks in the New Keynesian Phillips curve. A calibration of our model suggests that the supply-side effect increases the half-life of a monetary shock’s effect on output by about 30% and amplifies the total impact on output by about 70%. Using identified monetary shocks, we provide empirical evidence for both the macro- and micro-level predictions of our model.
Keywords: Monetary Policy; Productivity; Supply-Side Effects; Heterogeneous Firms
JEL Codes: E0; E12; E24; E3; E4; E5; L11; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary shocks (E39) | aggregate total factor productivity (TFP) (E23) |
| monetary shocks (E39) | resource reallocation among heterogeneous firms (F12) |
| resource reallocation among heterogeneous firms (F12) | aggregate total factor productivity (TFP) (E23) |
| monetary shocks (E39) | high-markup firms (L84) |
| high-markup firms (L84) | resource misallocation (D61) |
| resource misallocation (D61) | aggregate total factor productivity (TFP) (E23) |
| monetary easing (E52) | output and productivity (E23) |
| monetary easing (E52) | inflation (E31) |
| monetary easing (E52) | Phillips curve flattening (E31) |
| monetary shocks (E39) | procyclical hump-shaped response in TFP (O49) |
| monetary shocks (E39) | endogenous cost-push shocks (E31) |