|
|
|
| Monetary Policy,Consumption, and Investment Goods Inflation:A Financial Accelerator Perspective |
| LIN Dongjie, CUI Xiaoyong, GONG Liutang
|
| Guanghua School of Management, Peking University;School of Economics, Peking University;Guanghua School of Management, Peking University |
|
|
|
Abstract How monetary policy affects output and inflation is a fundamental question in macroeconomics. Consumption and investment are the two main components of the gross domestic product (GDP). Although a large body of literature has examined the inflation of consumption goods, few studies have focused on the inflation of investment goods. The inflation of these two sectors in China moved in a highly correlated manner before 2011, and then diverged after that year. Therefore, the relative price gap has increased since 2011, which suggests a different mechanism of inflation dynamics. This raises the question of how the monetary policy on output and inflation has affected these two sectors, how the monetary transmission mechanism differs between the two sectors, and what factors determine the inflation dynamics of the two sectors. By studying these problems, we can better understand the different behaviors of consumption and investment in relation to macroeconomic fluctuations. We also examine the impact of monetary policy on the economy and provide helpful suggestions for policy making in business cycles.
To provide empirical evidence, we use Bayesian VAR to evaluate the effects of monetary shocks on the output and inflation of the consumption and investment sectors. Following Litterman (1986), we estimate the BVAR and obtain the impulse response functions. Our impulse response analysis shows that when monetary policy is expansive, the output and inflation of both sectors increase. However, the increase in the output and inflation of the investment sector is greater than that in the consumption sector.
This paper establishes a two-sector new Keynesian DSGE model of consumption and investment goods production, and incorporates a financial accelerator to study the effects of a monetary shock on consumption and investment inflation. By incorporating the financial accelerator, our model can better characterize a firm's investment behavior. China's quarterly macroeconomic data are used to estimate the model using a Bayesian approach. The estimation results show that the degree of the nominal price rigidities of the consumption and investment sectors are high and very close. However, the external finance premium has different effects on firms' investment behavior, with the financial accelerator effect being stronger in the investment sector. The impulse response of the model under a monetary shock is consistent with the empirical evidence based on the BVAR analysis.
We further show that the demand structure heterogeneity of the two sectors is the key to explaining the effects of a monetary shock. Although firms are on the demand side of investment goods, they are also subject to financial friction when borrowing from financial intermediaries. The financial accelerator thus amplifies a firm's investment demand when the monetary policy is expansive. However, the demand for consumption goods has a smaller response to monetary shock, because households prefer consumption smoothing. Therefore, the heterogeneous demand effects result in different output and inflation dynamics. Our numerical simulation shows that the financial accelerator is the main factor influencing the effects of monetary shocks on investment output and inflation, and that it has minor effects on the consumption sector. A variance decomposition shows that aggregate technology, investment marginal efficiency, and monetary shocks are important determinants of business cycles.
This paper contributes to the literature by constructing a complete two-sector model characterizing the demand and supply sides of the consumption and investment sectors. Using a Bayesian estimation, we show that demand structure heterogeneity rather than nominal price rigidity is the key factor explaining the different responses of the two sectors to monetary shocks. Although our analysis of the investment sector is more generalized than in previous studies, our estimation results show that investment shocks are the main driving force of business cycles.
Overall, our results suggest that the central bank should take the structure and characteristics of different sectors into consideration when implementing monetary policy. The central bank should also pay attention to the financial condition of firms because it can change the transmission mechanism of monetary policy in different sectors.
|
|
Received: 02 January 2018
Published: 12 April 2019
|
|
|
|
|
|
|
|
