Abstract
Recent empirical studies reveal that monetary shocks can cause persistent fluctuations in aggregate output. In this paper, we propose a mechanism to help generate such persistence. Our dynamic stochastic general equilibrium model features a vertical input–output structure, with staggered price contracts at each stage of production. Working through the input–output relations and the timing of firms’ pricing decisions, the model generates persistent fluctuations in aggregate output and the observed patterns of price dynamics following a monetary shock. Output responses are more persistent, the greater the number of stages of production, and the larger the share of intermediate inputs. With a sufficient number of stages, the persistence is arbitrarily large if the share of intermediate inputs is one at all but finitely many stages.
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