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The Supply-Side Effects of Monetary Policy

By: Contributor(s): Material type: Continuing resourceContinuing resourcePublication details: Journal of Political Economy; 2024Description: 1065-1112ISSN:
  • 0022-3808
Subject(s): Online resources: Summary: We propose a supply-side channel for the transmission of monetary policy. We show that when high-markup firms have lower pass-throughs than low-markup firms, then positive demand shocks, such as monetary expansions, alleviate cross-sectional misallocation by reallocating resources to high-markup firms. Consequently, positive "demand shocks" are accompanied by endogenous positive "supply shocks" that raise productivity and lower inflation. We derive a tractable, four-equation model where monetary shocks generate hump-shaped productivity responses. In our calibration, the supply-side effect amplifies the total impact of monetary shocks on output by about 70%. We provide empirical evidence validating our model's predictions using identified monetary shocks.
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Article Index Article Index Dr VKRV Rao Library Vol. 132, No. 4 Not for loan AI728

We propose a supply-side channel for the transmission of monetary policy. We show that when high-markup firms have lower pass-throughs than low-markup firms, then positive demand shocks, such as monetary expansions, alleviate cross-sectional misallocation by reallocating resources to high-markup firms. Consequently, positive "demand shocks" are accompanied by endogenous positive "supply shocks" that raise productivity and lower inflation. We derive a tractable, four-equation model where monetary shocks generate hump-shaped productivity responses. In our calibration, the supply-side effect amplifies the total impact of monetary shocks on output by about 70%. We provide empirical evidence validating our model's predictions using identified monetary shocks.

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