Plant-Level Nonconvexities and the Monetary Transmission Mechanism

Roman Sustek

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: Micro-level empirical evidence suggests that plant managers adjust production by utilizing capital along nonconvex margins. Existing models of the monetary transmission mechanism (MTM), however, assume that production units adjust output smoothly. The objective of this paper is to determine whether such plant-level nonconvexities affect the MTM in a quantitatively significant way. To this end we replace the smooth production function in a prototypical model of the MTM with heterogeneous plants that adjust output along three nonconvex margins: intermittent production, shiftwork, and weekend work. We calibrate the model such that steady-state utilization of these margins is in line with U.S. data. We find that the nonconvexities dampen the responses of aggregate economic activity and prices to monetary policy shocks by about 50 percent relative to the standard model, thereby significantly reducing the effectiveness of the MTM. Due to heterogeneity and discrete choices at the plant level, monetary policy affects the output decisions of only 'marginal' plants - those close to being indifferent between alternative production plans. In equilibrium the measure of such plants is rather small. In addition, contrary to popular belief, the quantitative effects of monetary policy shocks on aggregate output do not significantly change with the degree of capacity utilization over the business cycle. The effects on inflation, however, do change substantially over the business cycle when monetary policy shocks are persistent.

Keywords: Asymmetries; heterogenous plants; monetary transmission mechanism; nonconvexities; nonlinear approximation. (search for similar items in EconPapers)
JEL-codes: E22 E23 E32 E52 (search for similar items in EconPapers)
Date: 2005-12
New Economics Papers: this item is included in nep-cba, nep-dcm, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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