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Long and Plosser Meet Bewley and Lucas∗

We develop a N -sector business-cycle network model a la Long and Plosser (1983), featuring heterogenous money demand a la Bewley (1980) and Lucas (1980). Despite incomplete markets and a well-defined distribution of real money balances across heterogeneous households, the enriched N -sector network model remains analytically tractable with closed-form solutions. Relying on the tractability, we establish several important results: (i) The economy’s input-output network linkages become endogenously time-varying over the business cycle– thanks to the influence of the endogenous distribution of money demand on cross-sector allocations of commodities. (ii) Despite flexible prices, money is not neutral and monetary injections can generate highly-persistent effects on sectoral output, thanks to the time-varying input-output linkages. (iii) Although money injection is distributed equally across households by design, the real effects are asymmetric across production sectors, e.g., the impact of money is strongest on downstream sectors which purchase intermediate goods from the rest of the economy (such as construction and transportation), but weakest on upstream sectors which supply intermediate goods to the other sectors (such as mining and manufacturing), in sharp contrast to the case of sectoral technology shocks and government spending shocks. Our model also shows that movements in the distribution of money demand could be an important source of the labor wedge documented by the business-cycle accounting literature.