The price effects of monetary shocks in a network economy

Antoine Mandel (1, 2) , Davoud Taghawi-Nejad (3, 4) , Vipin Veetil (5)

1 CES - Centre d'économie de la Sorbonne
2 PSE - Paris School of Economics
3 University of Oxford
4 Institute for New Economic Thinking
5 IIT Madras - Indian Institute of Technology Madras

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.

Mots clés: Prices; Money; Networks; Monetary shocks; Agent-based model; Out-of-equilibrium dynamics

Domaines: Economies et finances

Antoine Mandel, Davoud Taghawi-Nejad, Vipin Veetil. The price effects of monetary shocks in a network economy. Journal of Economic Behavior and Organization, 2019, 164, pp.300-316. ⟨10.1016/j.jebo.2019.06.009⟩. ⟨halshs-02334593⟩