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Delayed Output Response to Productivity Shocks in a Monetary Search Model

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  • Ling Sun

    (Brock University)

Abstract

Empirical evidence suggests that positive productivity shocks diffuse slowly in the economy. In particular, aggregate output reaches its peak nearly eight quarters after a shock. I construct a micro-founded monetary search model to explain the aforementioned empirical fact by focusing on a household’s endogenous decision in forming long-term trading relationships in addition to engaging in random matching in a frictional goods market. I show that a positive productivity shock induces households to immediately break marginal trading relationships, but that goods market frictions prolong the transition of the economy to the new steady state. Calibrating with U.S. data, the model matches the empirical evidence well and predicts that there is a slight decrease in aggregate output shortly after a positive productivity shock in some parameter region after which, it converges towards the new steady state with a higher level of aggregate output.

Suggested Citation

  • Ling Sun, 2018. "Delayed Output Response to Productivity Shocks in a Monetary Search Model," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 46(3), pages 251-266, September.
    • Handle: RePEc:kap:atlecj:v:46:y:2018:i:3:d:10.1007_s11293-018-9590-x
    DOI: 10.1007/s11293-018-9590-x
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