Endogenous Distribution Friction and Monetary Policy

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