The seminar started at 2:30 p.m. in Visitor Centre.
Abstract
Existing models of the transmission mechanism of monetary policy (TMMP) assume that production units have access to a smooth aggregate production function. Micro-level empirical evidence, however, suggests that production plants adjust output by utilizing capital along nonconvex margins. The objective of this paper is to determine whether such plant-level nonconvexities affect the transmission mechanism in a quantitatively significant way. To this end we replace the smooth aggregate production function in a prototypical model of the TMMP with heterogenous plants that adjust output along three nonconvex margins: intermittent production, shiftwork, and weekend work. We calibrate the model such that steady-state utilization of these margins is in line with U.S. data. We find that the nonconvexities dampen the responses of aggregate economic activity and prices to monetary policy shocks by about 50 percent, relative to the standard model, thereby significantly reducing the effectiveness of the transmission mechanism. Due to heterogeneity and discrete choices at the plant level, monetary policy affects output decisions of only "marginal" plants; those close to being indiferent between alternative production plans. In equilibrium the measure of such plants is rather small. In addition, the quantitative effects of monetary policy shocks on aggregate output do not significantly change with the degree of capital utilization over the business cycle. The effects on inflation, however, do change substantially over the business cycle when monetary policy shocks are persistent.
JEL Classifcation: E22, E23, E32, E52
Keywords: Nonconvexities, heterogenous plants, transmission of monetary
policy, asymmetries, nonlinear approximation