Specific Factors Meet Intermediate Inputs: Implications for Strategic Complementarities and Persistence

FRB of Kansas City Working Paper No. 04-06

FRB Philadelphia Working Paper No. 04-7

44 Pages Posted: 7 Feb 2005

See all articles by Kevin X. D. Huang

Kevin X. D. Huang

Federal Reserve Bank of Philadelphia; Vanderbilt University - College of Arts and Science - Department of Economics

Date Written: June 2004

Abstract

A central challenge to monetary business-cycle theory is to find a solution to the problem of persistence and delay in the real effects of monetary shocks. Previous research has identified separately specific factors and intermediate inputs as two promising mechanisms for generating the persistence and delay in a staggered price-setting framework. Models based on either of these two mechanisms have also been used in the design of optimal monetary policy. By examining a staggered price model that features both specific factors and intermediate inputs, I find an offsetting interaction between the two individually promising mechanisms, which leads to a cancellation of much of the impact of each in propagating monetary shocks. This finding posits a challenge to the search for robust monetary transmission mechanism and design of optimal monetary policy.

Keywords: Specific Factors, Intermediate Inputs, Strategic Complementarities, Persistence, Hump-Shape

JEL Classification: E24, E32, E52

Suggested Citation

Huang, Kevin X. D., Specific Factors Meet Intermediate Inputs: Implications for Strategic Complementarities and Persistence (June 2004). FRB of Kansas City Working Paper No. 04-06; FRB Philadelphia Working Paper No. 04-7. Available at SSRN: https://ssrn.com/abstract=516502 or http://dx.doi.org/10.2139/ssrn.516502

Kevin X. D. Huang (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States

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