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Time-Varying Networks and the Efficacy of Money Without Sticky Prices

Author

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  • Feng Dong

    (Shanghai Jiao Tong University)

  • Yi Wen

    (Federal Reserve Bank of St. Louis)

Abstract

We build an analytically tractable model of dynamic production networks with incomplete insurance markets and heterogeneous money demand. We use the model to quantify the classic Baumol-Tobin redistribution channel of monetary policy. Our model can explain (i) the joint distribution of household consumption and money demand and (ii) the strong propagation mechanism of monetary shocks for the business cycle found in empirical VARs across production sectors. We show that the Baumol-Tobin redistribution channel of monetary non-neutrality can be greatly magnified and propagated through endogenous leisure choices and production networks. Our model can account for the hump-shaped impulse responses of sectoral output and employment to monetary shocks, thanks to the endogenous linkage between the distribution of household money demand and firms' input-output coefficient matrix. Our model provides an alternative framework to the Heterogeneous Agent New Keynesian (HANK) model for monetary policy analysis.

Suggested Citation

  • Feng Dong & Yi Wen, 2019. "Time-Varying Networks and the Efficacy of Money Without Sticky Prices," 2019 Meeting Papers 1464, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1464
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    References listed on IDEAS

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