Long-term business relationships, bargaining and monetary policy
WPnull/19 Long-term business relationships, bargaining and monetary policy
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A growing empirical literature documents the importance of long-term relationships and bargaining for price rigidity and firms' dynamics. This paper introduces long-term business-to-business (B2B) relationships and price bargaining into a standard monetary DSGE model. The model is based on two assumptions: first, both wholesale and retail producers need to spend resources to form new business relationships. Second, once a B2B relationship is formed, the price is set in a bilateral bargaining between firms. The model provides a rigorous framework to study the effect of long-term business relationships and bargaining on monetary policy and business cycle dynamics. It shows that, for a standard calibration of the product market, these relationships reduce both the allocative role of intermediate prices and the real effects of monetary policy shocks. We also find that the model does a good job in replicating the second moments and cross-correlations of the data, and that it improves over the benchmark New Keynesian model in explaining some of them.
Classification JEL:JEL: E52, E3,D4,L11
Keywords:Monetary Policy, PriceBargaining, ProductMarketSearch, B2B
Number of Pages:31