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As industrialization and globalization are spread across the world, price competition is growing fierce in the final-good sector while many intermediate goods are enjoying global imperfect competition. Hence, when prices of intermediate goods are globally sticky in LCP (local-currency pricing) but consumer prices are flexible, the determinants of the short-run real effects of monetary and government spending shocks are explored in an open economy model with labor market inefficiency and global sourcing. Major findings are as follows: first, in the presence of a structural inefficiency in labor market, monetary and government spending shocks have ambiguous effects on the demand for domestic intermediate goods; second, even if there is price stickiness in the intermediate-good sector, monetary and government spending shocks may not affect final output in the short run; third, the natural rate of unemployment, the natural rate of productivity growth, and the trade-off between unemployment and inflation play a key role for exchange rate changes to bring forth beneficial real effects.

Global Intermediate-Good Price Stickiness and the Determinants of the Real Effects of Monetary and Government Spending Shocks