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

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.