Specific factors meet intermediate inputs

Description

"The recent years have witnessed a surge of studies on the propagation mechanisms embedded in monetary business cycle models with the hope of generating strategic complementarities in pricing and delayed yet persistent effects of monetary shocks. Two sources of propagation that have been analyzed separately are specific factors and intermediate inputs. This paper presents a DSGE model featuring a CES sub-function of these two forms of production inputs. It derives a closed-form equilibrium relation to decompose analytically the roles of these two sources and their interactions in generating strategic complementarities, persistence, and hump shapes. It obtains a necessary and sufficient condition for the response of real GDP to a monetary shock to be hump-shaped, and solve analytically for the timing of the peak, both of which are shown to be characterized by the degree of strategic complementarities and parameters governing the process of money growth. My analysis demonstrates that the presence of intermediate inputs may weaken the impact of specific factors in the propagation of monetary shocks. Hence, this interaction may reduce the possibility of a hump in the impulse-response function or may shift the timing of the hump to an earlier date"--Federal Reserve Bank of Philadelphia web site.

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