Monetary shocks cause uneven effects along supply chains and GDP
Network Origins of the Money-Output Relation
Social and Information Networks
Summary
Changes in money supply affect the economy unevenly because companies buy inputs from others with different time delays and use their current money to pay for them. The authors show that when money supply changes, smaller and downstream companies are affected differently than larger or upstream ones. Negative money shocks strongly reduce economic output, while positive shocks only mildly increase it. This happens because the way resources shift along the supply chain and miscoordination of inputs amplify negative effects more than positive ones.
What this means in practice
- •For economic policy advisors: Design monetary policies accounting for supply chain structures to better predict asymmetric impacts on GDP during money supply changes.
- •For supply chain analysts: Model how financial shocks redistribute resources along supply chains to forecast firm-level output changes after monetary shifts.
Authors
Vipin P Veetil
Abstract
This paper develops a dynamic production-network model in which monetary non-neutrality emerges under fully flexible prices. Firms finance intermediate-input purchases from current nominal balances, and intermediate goods arrive with heterogeneous lead times across suppliers. A monetary shock then has two distinct effects. The first is miscoordination: because production uses dated input bundles assembled under past nominal conditions, the shock disturbs the composition of usable inputs (within and across firms) and thereby generates a deadweight loss. The second is reallocation: because the incidence of the shock is tilted toward smaller firms, which are disproportionately downstream, the shock redistributes resources along the supply chain. More specifically, positive shocks push resources downstream, negative shocks pull them upstream. This means that under a negative shock, both the miscoordination and the reallocation effect reduce downstream output and therefore GDP. Under a positive shock, reallocation raises GDP while miscoordination reduces it. The money-output relation is therefore sign-asymmetric: negative shocks generate sharp contractions, while positive shocks generate at most mild expansions, and sometimes none. Computational experiments on a reconstructed US production network generate output declines after a monetary contraction that are about three times as large as the increases after a monetary expansion.