A Multisector TANK-IO model: the heterogeneity in the production economy matters for inequality

Abstract: Recent evidence suggests that firms’ heterogeneity in price rigidity interacts with the production networks interdependencies in the transmission of monetary policy shocks. Moreover, US and euro-area micro-data show that a sizable fraction of households do not hold assets, known as Hand-to-Mouth households. We develop a Multisector Two Agents New Keynesian model with Input-Output linkages (Multisector TANK-IO) to analyze the real effects of monetary policy in the presence of Hand-to-Mouth households, firms’ heterogeneity in price rigidity and the production networks interdependencies. We find that the interaction between the presence of Hand-to-Mouth households and sectoral heterogeneity in price rigidity leads to the amplification of the real effects of monetary policy, with the real wage increase channel playing a key role. If we add the presence of production networks interdependencies, the amplification is even higher as the lower real interest rate incentivizes more spending by the Savers households.