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

By Kevin X.D. Huang
Revised:  February 2005
(First Version:  June 2004)
RWP 04-06
Research Division 
Federal Reserve Bank of Kansas City 

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, the author finds 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 Codes: E24; E32; E52

Kevin Huang is an economic advisor and economist at the Federal Reserve Bank of Philadelphia. The author is grateful to V. V. Chari, Mark Gertler, Joe Haslag, Sharon Kozicki, John Leahy, Ellen McGrattan, Richard Rogerson, and seminar participants at Arizona State University, the Federal Reserve Bank of Kansas City, and Philadelphia, for useful conversations. Special thanks go to Russell Cooper, Mike Dotsey, John Haltiwanger, and Manuel Santos for helpful comments and suggestions. The views expressed herein are solely those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

Huang email:  kevin.huang@phil.frb.org

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