State-dependent Distribution Friction and Monetary Policy

44 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


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

Cheng, Dong and Vu, Nam, State-dependent Distribution Friction and Monetary Policy (December 29, 2020). Available at SSRN: or

Dong Cheng

Union College ( email )

807 Union Street
Schenectady, NY 12308
United States


Nam Vu (Contact Author)

Miami University ( email )

800 E High St
Oxford, OH 45056
United States


Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
PlumX Metrics