The Supply-Side Effects of Monetary Policy

David Baqaee, Emmanuel Farhi and Kunal Sangani

No 28345, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a supply-side channel for the transmission of monetary policy. We show that in an economy with heterogeneous firms and endogenous markups, demand shocks such as monetary shocks have a first-order effect on aggregate productivity. If high-markup firms have lower pass-throughs than low-markup firms, as is consistent with empirical evidence, then a monetary easing reallocates resources to high-markup firms and alleviates misallocation. Consequently, positive “demand shocks” are accompanied by endogenous positive “supply shocks” that raise output and productivity, lower inflation, and flatten the Phillips curve. We derive a tractable four-equation dynamic model and use it to show that monetary shocks generate a procyclical hump-shaped response in TFP and endogenous cost-push shocks in the New Keynesian Phillips curve. A calibration of our model suggests that the supply-side effect increases the half-life of a monetary shock’s effect on output by about 30% and amplifies the total impact on output by about 70%. Using identified monetary shocks, we provide empirical evidence for both the macro- and micro-level predictions of our model.

JEL-codes: E0 E12 E24 E3 E4 E5 L11 O4 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (17)

Published as David R. Baqaee & Emmanuel Farhi & Kunal Sangani, 2024. "The Supply-Side Effects of Monetary Policy," Journal of Political Economy, vol 132(4), pages 1065-1112.

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Journal Article: The Supply-Side Effects of Monetary Policy (2024)
Working Paper: The Supply-Side Effects of Monetary Policy (2021)
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