Inflation and GDP Dynamics in Production Networks: A Sufficient Statistics

Moreover, Lt is the household’s labor supply at wage Wt, Pi,t is the price of the final good of sector i, Profitst is the aggregate profits of all monopolistic firms in the economy rebated to the household and Tt is a lump-sum transfer, possibly zero, used by the government to finance taxes or subsidies on firms. [...] The observation in Remark 2 demonstrates the power of expressing inflation dynamics in terms of sectoral price gaps relative to a counterfactual equilibrium with flexible prices because it implies that solving for the dynamics of prices for a given path of pft is equivalent to having characterized impulse response functions of all the prices in the economy to all three types of TFP, markup, and mo. [...] The node L represents labor as the only factor of production and 1− γ represents the expenditure share of labor in the production of the only producing sector in the efficient steady-state. [...] The node H represents the household as the final consumer and the number on every arriving edge represents the expenditure share of household from the corresponding sector in the efficient steady-state. [...] To further show clearly these input-output mechanisms that lead to such spillover effects on sectoral inflation and GDP, Figure 8, we show how the impact effect on sectoral inflation and CIR of sectoral consumption correlate with the input share of the computers and electronics sector in various sectors in the economy.29 As is clear, the higher the input share of the computers and electronics sect.