Working Paper: NBER ID: w31218
Authors: Hassan Afrouzi; Saroj Bhattarai
Abstract: We derive closed-form solutions and sufficient statistics for inflation and GDP dynamics in multi-sector New Keynesian economies with arbitrary input-output linkages. Analytically, we decompose how production linkages (1) amplify the persistence of inflation and GDP responses to monetary and sectoral shocks and (2) increase the pass-through of sectoral shocks to aggregate inflation. Quantitatively, we confirm the significant role of production networks in shock propagation, emphasizing the disproportionate effects of sectors with large input-output adjusted price stickiness: The three sectors with the highest contribution to the persistence of aggregate inflation have consumption shares of around zero but explain 16% of monetary non-neutrality.
Keywords: Inflation; GDP Dynamics; Production Networks; Sufficient Statistics
JEL Codes: C67; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Production linkages (O19) | Persistence of inflation and GDP responses (E31) |
| High input-output adjusted price stickiness (E31) | Aggregate inflation persistence (E31) |
| Inflation in upstream sector with flexible prices (E31) | Aggregate inflation (E31) |
| Inflation in stickier sector (E31) | Persistent spillover effects (C41) |
| Longer durations of price spells (C41) | More persistent aggregate inflation effects (E31) |
| Sectoral shocks inducing persistent inflation responses (E31) | Larger GDP gap effects (F62) |