Monetary Dynamics in a Network Economy

Antoine Mandel and Vipin Veetil ()
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Vipin Veetil: IIT Madras - Indian Institute of Technology Madras

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Abstract: We develop a tractable model of out-of-equilibrium dynamics in a general equilibrium economy with cash-in-advance constraints. The dynamics emerge from local interactions between firms governed by the production network underlying the economy. We analytically characterise the influence of network structure on the propagation of monetary shocks. In the long run, the model converges to general equilibrium and the quantity theory of money holds. In the short run, monetary shocks propagate upstream via nominal demand changes and downstream via real supply changes. Lags in the evolution of supply and demand at the micro level can give rise to arbitrary dynamics of the distribution of prices. Our model explains the long standing Price Puzzle: a temporary rise in the price level in response to monetary contractions. The Price Puzzle emerges under two assumptions about downstream firms: they are disproportionally affected by monetary contractions and they account for a sufficiently small share of the wage bill. Empirical evidence supports the two assumptions for the US economy. Our model calibrated to the US economy using a data set of more than fifty thousand firms generates the empirically observed magnitude of the price level rise after monetary contractions.

Keywords: Price Puzzle; Production Network; Money; Monetary Non-Neutrality; Out-Of-Equilibrium dynamics; Réseaux de production; dynamique hors-équilibre (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-net
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-02354576v1
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Published in 2019

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Related works:
Journal Article: Monetary dynamics in a network economy (2021)
Working Paper: Monetary dynamics in a network economy (2021)
Working Paper: Monetary dynamics in a network economy (2021)
Working Paper: Monetary dynamics in a network economy (2021)
Working Paper: Monetary Dynamics in a Network Economy (2019)
Working Paper: Monetary Dynamics in a Network Economy (2019)
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