Inflation and GDP Dynamics in Production Networks: A Sufficient Statistics Approach
We derive closed-form solutions and sufficient statistics for inflation and GDP dynamics in multi-sector New Keynesian economies with arbitrary input-output linkages. Analytically, we decompose how production linkages (1) amplify the persistence of inflation and GDP responses to monetary and sectoral shocks and (2) increase the pass-through of sectoral shocks to aggregate inflation. Quantitatively, we confirm the significant role of production networks in shock propagation, emphasizing the disproportionate effects of sectors with large input-output adjusted price stickiness: The three sectors with the highest contribution to the persistence of aggregate inflation have consumption shares of around zero but explain 16% of monetary non-neutrality.
We thank Olivier Coibion, Andres Drenik, Jennifer La’O, Guido Lorenzoni, Emi Nakamura, Alireza Tahbaz-Salehi, Mathieu Taschereau-Dumouchel, Felipe Schwartzman, Jón Steinsson, Harald Uhlig, Iván Werning, Mike Woodford, Pierre Yared as well as seminar and conference participants at numerous institutions for helpful comments. Raphael Schoenle generously shared data on the sectoral frequencies of price adjustments. We thank Edson Wu for outstanding research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.