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Vertical Production and Macroeconomic Persistence: The Case of an Emerging Market Economy

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  • Mai Farid
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    Abstract

    Empirical studies reveal persistence of macroeconomic variables to nominal shocks. However, theoretical models fail to match the data. This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model with vertical input-output production, imperfect competition and staggered prices at each stage of production to reconcile theoretical models with empirical observations. We find that output response to stage-specific technological change and demand shock is more persistent the greater the number of production stages and the larger the share of intermediate goods in final good production. Depending on the source of technological change, we may either have contractionary or expansionary impact on macroeconomic variables.

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    Paper provided by Department of Economics, University of York in its series Discussion Papers with number 09/11.

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    Handle: RePEc:yor:yorken:09/11

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    Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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    Web page: http://www.york.ac.uk/economics/
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    Keywords: Vertical production chain; Staggered price contracts; Persistence; Technological change.;

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