Firm-specific factors and the state-dependent effects of monetary policy

Abstract This article demonstrates that firm-specific capital generates non-linear output responses to monetary policy shocks across the business cycle. The implied concave relationship between desired reset prices and aggregate demand conditions results in stronger output responses to monetary measures in expansionary states. The above mechanism alone explains procyclical output response to monetary policy shocks in a canonical sticky-price model. This model feature is supported by empirical evidence from a smooth transition local projection model.