Endogenous Distribution Friction and Monetary Policy

41 Pages Posted: 2 Dec 2020 Last revised: 31 Dec 2020

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 endogenous distribution frictions using a dynamic multi-sector model motivated by Corsetti and Dedola (2005). Our benchmark model features distribution frictions that depend on the state of the economy and predicts counter-cyclical distribution margins, which is consistent with the empirical evidence from Brazilian fuel price data. Estimating an augmented model with price and wage rigidities, we attribute the lion's share of such countercyclicality to productivity shocks arising from the service sector. From a policy perspective, we find the endogenous distribution friction significantly amplifies money neutrality as the distribution cost dampens the consumption response to a monetary policy shock. Our counterfactual analyses demonstrate that a model with exogenous distribution frictions cannot replicate this result.

Keywords: Endogenous Distribution Friction, Monetary Policy, Nominal Rigidity

JEL Classification: E3, E5

Suggested Citation

Cheng, Dong and Vu, Nam, Endogenous Distribution Friction and 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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