Assistant Professor of Economics Dong Cheng has published a paper in the European Economic Review showing that changes in distribution frictions over the business cycle can weaken the real effects of monetary policy by dampening the response of consumption.
Using a dynamic, multi-sector general equilibrium model, the authors show that the distribution margin is countercyclical, consistent with micro-level price evidence, and find that much of this pattern is driven by productivity shocks in the service sector. When distribution frictions vary with the state of the economy, consumption responds less strongly to monetary policy shocks, weakening their real effects. A model with time-invariant distribution frictions cannot reproduce this result. The findings identify a new channel through which sectoral productivity and the distribution system jointly influence the effectiveness of monetary policy.