Specific factors meet intermediate inputs: implications for the persistence problem

Abstract

A central challenge to monetary business cycle theory is to find a solution to the problem of persistence in the real effect of monetary shocks. Previous research has identified separately specific factors and intermediate inputs as two promising mechanisms for generating the persistence in a staggered price-setting framework. By examining a staggered price model that features both specific factors and intermediate inputs, this paper finds an offsetting interaction between the two individually promising mechanisms, which leads to a cancelation of much of the impact of each in propagating monetary shocks. This finding posits a challenge to the search of robust monetary transmission mechanism for solving the persistence problem. (Copyright: Elsevier)