Sticky production and monetary policy

Jenny Chan, Sebastian Diz and Derrick Kanngiesser
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Jenny Chan: Bank of England
Sebastian Diz: Central Bank of Paraguay
Derrick Kanngiesser: Independent Researcher

No 1155, Bank of England Staff Working Paper series from Bank of England

Abstract: We study a New Keynesian model where production inputs and pricing decisions are made under information frictions. Firm production is constrained by inputs that are chosen before shocks are realized, based on firms’ expectations of future demand. We show that the assumption of real rigidities versus nominal rigidities is not innocuous, as assuming the presence of either or both affects the pass-through of demand shocks to aggregate output and inflation. When the choice of production inputs is made under imperfect information about demand shocks, the impact on inflation is amplified while the impact on output is dampened. When both production inputs and pricing decisions are made under imperfect information about demand shocks, the pass-through to output is amplified while the impact on inflation is dampened. Additionally, we show that expectations about demand can behave similarly to a supply shock, as these expectations influence the natural level of output and enter the New Keynesian Phillips curve in a manner analogous to a cost-push shock. Empirical evidence suggests that inflation falls following a positive surprise in industrial production, consistent with the model version featuring real rigidities.

Keywords: Information frictions; New Keynesian; real rigidities (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Pages: 33
Date: 2025-11-21
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:023277

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