The price effects of monetary shocks in a network economy
Antoine Mandel,
Davoud Taghawi-Nejad and
Vipin Veetil
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Davoud Taghawi-Nejad: University of Oxford, Institute for New Economic Thinking
Vipin Veetil: IIT Madras - Indian Institute of Technology Madras
PSE-Ecole d'économie de Paris (Postprint) from HAL
Abstract:
Empirical evidence shows monetary shocks have two temporary effects on the distribution of prices. One, the dispersion of cross-section of prices increases in response to monetary shocks. Two, some prices change in the ‘wrong' direction: some prices decrease in response to positive monetary shocks, and increase in response to negative monetary shocks. We present a model that generates the two effects of monetary shocks on the distribution of prices as an out-of-equilibrium phenomena. Firms are related to each other through a production network. Monetary shocks change the working capital of a subset of firms and percolate to other firms through buyer-seller linkages. Price dispersion increases because the percolation of a monetary shock through the production network causes prices to differentially deviate from their steady state values. Some prices change in the wrong direction because a shift in one firm's demand causes a shift in another firm's supply (and vice-versa), thereby generating complicated chains of bi-directional price changes. Monetary shocks can significantly disturb relative prices even when all prices are fully flexible.
Keywords: Prices; Money; Networks; Monetary shocks; Agent-based model; Out-of-equilibrium dynamics (search for similar items in EconPapers)
Date: 2019-08
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-02334593v1
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Citations: View citations in EconPapers (3)
Published in Journal of Economic Behavior and Organization, 2019, 164, pp.300-316. ⟨10.1016/j.jebo.2019.06.009⟩
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Journal Article: The price effects of monetary shocks in a network economy (2019) 
Working Paper: The price effects of monetary shocks in a network economy (2019) 
Working Paper: The price effects of monetary shocks in a network economy (2019) 
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Persistent link: https://EconPapers.repec.org/RePEc:hal:pseptp:halshs-02334593
DOI: 10.1016/j.jebo.2019.06.009
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