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Rigid production networks

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  • Pellet, Thomas
  • Tahbaz-Salehi, Alireza

Abstract

This paper studies a production network model with quantity rigidities and informational frictions, where (i) firms may be restricted in how effectively they can adjust (some or all of) their intermediate input quantities in response to changes in the economic environment and (ii) they need to choose their quantities under incomplete information about the realizations of shocks. Our characterization results show that these two frictions lead to a reduction in aggregate output, as firms may find it optimal to rely more heavily on less volatile suppliers, even if it comes at the cost of forgoing more efficient ones. We also find that the interaction between informational frictions and quantity rigidities dampens the impact of productivity and aggregate demand shocks on aggregate output, while increasing the inflationary effects of positive shocks to nominal aggregate demand. The magnitudes of these effects depend on the distribution of the two frictions over the production network.

Suggested Citation

  • Pellet, Thomas & Tahbaz-Salehi, Alireza, 2023. "Rigid production networks," Journal of Monetary Economics, Elsevier, vol. 137(C), pages 86-102.
    • Handle: RePEc:eee:moneco:v:137:y:2023:i:c:p:86-102
    DOI: 10.1016/j.jmoneco.2023.05.008
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    References listed on IDEAS

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    Cited by:

    1. Iovino, Luigi, 2023. "Comment on “Rigid production networks” by Pellet and Tahbaz-Salehi," Journal of Monetary Economics, Elsevier, vol. 137(C), pages 103-106.

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