State-dependent Distribution Friction and the Transmission of Monetary Policy
48 Pages Posted: 2 Dec 2020 Last revised: 31 Oct 2023
Date Written: December 29, 2020
Abstract
We examine the quantitative importance of state-dependent distribution friction for the transmission of monetary policy shocks using a dynamic multi-sector model. Our benchmark model predicts a counter-cyclical distribution margin consistent with micro price data from Brazil. By estimating an augmented model with price and wage rigidities, we attribute the lion’s share of such countercyclicality to service sector productivity shocks. We further find that state-dependent distribution friction improves the model’s matching with aggregate data and significantly amplifies money neutrality by dampening consumption response to monetary policy shocks. This dampening effect cannot be replicated with time-invariant distribution friction, highlighting the indispensable role of state dependence.
Keywords: State-dependent Distribution Friction, Monetary Policy, Nominal Rigidities, Money Neutrality
JEL Classification: E3, E5
Suggested Citation: Suggested Citation