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Sectoral Interactions and Monetary Policy under Costly Price Adjustments

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  • Kevin X. D. Huang

    (Department of Economics, Vanderbilt University)

  • Jonathan L. Willis

    (Research Department, Federal Reserve Bank of Kansas City)

Abstract

This paper presents a state-dependent pricing model with a two-stage chainof-production structure and serially correlated, idiosyncratic price adjustment cost process in each sector. The model can explain much of the observed volatility and persistence of inflation and output, and nonlinearity and asymmetry in the responses of prices and quantities to monetary shocks. We derive analytical solutions in a static version of the model to illustrate the main results and to gain insights. We solve the dynamic model using a modified nonlinear solution method that features indirect inference and self-validating inflation forecasts as key components.

Suggested Citation

  • Kevin X. D. Huang & Jonathan L. Willis, 2018. "Sectoral Interactions and Monetary Policy under Costly Price Adjustments," Annals of Economics and Finance, Society for AEF, vol. 19(2), pages 337-374, November.
    • Handle: RePEc:cuf:journl:y:2018:v:19:i:2:huang:willis
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    More about this item

    Keywords

    State-dependent pricing; Chain of production; Persistent price adjustment costs; Self-validating inflation forecasts; Asymmetry;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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