Global Intermediate-Good Price Stickiness and the Determinants of the Real Effects of Monetary and Government Spending Shocks

Abstract

As industrialization and globalization are spread across the world, price competition is growing fierce in the final-good sector while many intermediate goods are enjoying global imperfect competition. Hence, when prices of intermediate goods are globally sticky in LCP (local-currency pricing) but consumer prices are flexible, the determinants of the short-run real effects of monetary and government spending shocks are explored in an open economy model with labor market inefficiency and global sourcing. Major findings are as follows: first, in the presence of a structural inefficiency in labor market, monetary and government spending shocks have ambiguous effects on the demand for domestic intermediate goods; second, even if there is price stickiness in the intermediate-good sector, monetary and government spending shocks may not affect final output in the short run; third, the natural rate of unemployment, the natural rate of productivity growth, and the trade-off between unemployment and inflation play a key role for exchange rate changes to bring forth beneficial real effects.