State-dependent Distribution Friction and the Transmission of Monetary Policy

48 Pages Posted: 2 Dec 2020 Last revised: 31 Oct 2023

See all articles by Dong Cheng

Dong Cheng

Union College

Nam Vu

Miami University

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

Cheng, Dong and Vu, Nam, State-dependent Distribution Friction and the Transmission of Monetary Policy (December 29, 2020). Available at SSRN: https://ssrn.com/abstract=3730638 or http://dx.doi.org/10.2139/ssrn.3730638

Dong Cheng

Union College ( email )

807 Union Street
Schenectady, NY 12308
United States

HOME PAGE: http://www.dongcarlcheng.com

Nam Vu (Contact Author)

Miami University ( email )

800 E High St
Oxford, OH 45056
United States

HOME PAGE: http://www.namtvu.com

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