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Long-term business relationships, bargaining and monetary policy

Author

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  • Abbritti, Mirko
  • Aguilera-Bravo, Asier
  • Trani, Tommaso

Abstract

We analyze a monetary economy where firms trading intermediate inputs engage in long-term business-to-business (B2B) relationships. We focus on features such as search for business partners, price negotiation and productivity levels that can make it convenient to separate a relationship. These features are introduced into an otherwise standard New Keynesian (NK) model for policy analysis, where the central bank adopts a Taylor rule. As a result of these features of the B2B relationships, final price and intermediate price inflation are generally not aligned, which is realistic but overlooked by the standard NK model. Consequently, we can investigate the extent to which the allocative role of the intermediate price contributes to the transmission of monetary policy shocks. We find that an allocative role arises from the endogenous separations of the relationships. However, this role is smaller than that in the standard NK model, leading to a comparable but micro-founded alternative explanation of the U.S. business cycle moments.

Suggested Citation

  • Abbritti, Mirko & Aguilera-Bravo, Asier & Trani, Tommaso, 2021. "Long-term business relationships, bargaining and monetary policy," Economic Modelling, Elsevier, vol. 101(C).
  • Handle: RePEc:eee:ecmode:v:101:y:2021:i:c:s0264999321001401
    DOI: 10.1016/j.econmod.2021.105551
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    More about this item

    Keywords

    Monetary policy; Price bargaining; Product market search; B2B;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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