Production networks and the flattening of the Phillips curve

This paper analyzes the role that changes in the structure of production networks have had on the flattening of the Phillips curve in recent decades. I build a multi-sector model with production networks and with heterogeneity in input-output linkages and in the degree of nominal rigidities. In the production network model, inflation sensitivity to the output gap depends on the topology of the network of the economy. In particular, I show that two characteristics of the network matter for inflation dynamics: (i) the network multiplier and (ii) output shares. Analyzing the U.S. input-output structure from 1963 to 2017, I document structural changes in the production network. Calibrating the model to these sectoral changes can account for a decrease in the slope of up to 15 percent. Decomposing the aggregate effect shows that the flattening is primarily due to an increase in the centrality of sectors with more rigid prices that is incompletely reflected by compositional changes in value-added.