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

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 a robust monetary transmission mechanism and design of optimal monetary policy.