State-dependent Distribution Friction and Monetary Policy
44 Pages Posted: 2 Dec 2020 Last revised: 31 Oct 2023
Date Written: December 29, 2020
We examine the quantitative importance of state-dependent distribution friction using a dynamic multi-sector model. Our model predicts a counter-cyclical distribution margin, consistent with the empirical evidence from Brazilian fuel price data. Estimating an augmented model with price and wage rigidity, we attribute the lion’s share of such countercyclicality to productivity shocks from the service sector. We find that the state-dependent distribution friction significantly amplifies money neutrality as higher distribution friction dampens the consumption response to monetary policy shocks. A model with time-invariant distribution friction cannot replicate this result.
Keywords: State-dependent Distribution Friction, Monetary Policy, Nominal Rigidity
JEL Classification: E3, E5
Suggested Citation: Suggested Citation