Industrial Heterogeneity in Response to Factor Price Shocks: A Dynamic Framework of Production with Money Input

Abstract

This thesis studied heterogeneity in firms' use of monetary assets and how it led to differential reactions to monetary shocks. I reviewed studies on the dynamics in industry-level and firm-level output, sales, employment, and investment in response to monetary policy shocks and during business cycle phases, summarized the implication to monetary transmission mechanism, to patterns in industrial and firm themselves' behaviors, and to welfare redistribution, and suggested new classification system of firms for better aggregation. I proposed a general framework of incorporating dynamics into modelling non-financial firms' multi-period production using flexible functional forms, a model family which was originally devised static and often undermined by dynamic misspecification issue in application. Then I applied the framework to the U.S. production data to model industry-level cost functions, and analyzed implication of dynamics in output, investment, and labor demand upon shocks from monetary asset prices, capital price, wage and so on. I identified a monetary transmission channel by examining the asset side of producer's balance sheet, different from any known channels which mainly affect real economic activities through financing and the liability side of producers' balance sheet. I call this mechanism the currency channel. In addition, I proposed the invariance of intermediate input price elasticity of output in production planning period horizon. Last, the application itself adds more empirical tests to assessing the competence of some flexible functional forms in modeling cost functions.