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 show how (1) production linkages amplify inflation and GDP persistence in response to monetary and sectoral shocks and (2) monetary policies that stabilize price indices or the GDP gap affect shock propagation. Quantitatively, sectors with large input-output adjusted price stickiness have disproportionate effects relative to their GDP shares: The three sectors with the highest contribution to the persistence of aggregate inflation have GDP shares of around zero but explain 16% of monetary non-neutrality.
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