Specific Factors Meet Intermediate Inputs: Implications for Strategic Complementarities and Persistence
FRB of Kansas City Working Paper No. 04-06
44 Pages Posted: 7 Feb 2005
Date Written: June 2004
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: Suggested Citation