Input–output interactions and optimal monetary policy

Ivan Petrella; Emiliano Santoro

doi:10.1016/j.jedc.2011.04.015

Input–output interactions and optimal monetary policy

Ivan Petrella, Emiliano Santoro

Økonomisk Institut

13 Citationer (Scopus)

Abstract

This paper deals with the implications of factor demand linkages for monetary policy design in a two-sector dynamic general equilibrium model. Part of the output of each sector serves as a production input in both sectors, in accordance with a realistic input–output structure. Strategic complementarities induced by factor demand linkages significantly alter the transmission of shocks and amplify the loss of social welfare under optimal monetary policy, compared to what is observed in standard two-sector models. The distinction between value added and gross output that naturally arises in this context is of key importance to explore the welfare properties of the model economy. A flexible inflation targeting regime is close to optimal only if the central bank balances inflation and value added variability. Otherwise, targeting gross output variability entails a substantial increase in the loss of welfare.

Originalsprog	Engelsk
Tidsskrift	Journal of Economic Dynamics and Control
Vol/bind	35
Udgave nummer	11
Sider (fra-til)	1817–1830
ISSN	0165-1889
DOI	https://doi.org/10.1016/j.jedc.2011.04.015
Status	Udgivet - nov. 2011

Adgang til dokumentet

10.1016/j.jedc.2011.04.015

Citationsformater

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abstract = "This paper deals with the implications of factor demand linkages for monetary policy design in a two-sector dynamic general equilibrium model. Part of the output of each sector serves as a production input in both sectors, in accordance with a realistic input–output structure. Strategic complementarities induced by factor demand linkages significantly alter the transmission of shocks and amplify the loss of social welfare under optimal monetary policy, compared to what is observed in standard two-sector models. The distinction between value added and gross output that naturally arises in this context is of key importance to explore the welfare properties of the model economy. A flexible inflation targeting regime is close to optimal only if the central bank balances inflation and value added variability. Otherwise, targeting gross output variability entails a substantial increase in the loss of welfare.",

author = "Ivan Petrella and Emiliano Santoro",

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AB - This paper deals with the implications of factor demand linkages for monetary policy design in a two-sector dynamic general equilibrium model. Part of the output of each sector serves as a production input in both sectors, in accordance with a realistic input–output structure. Strategic complementarities induced by factor demand linkages significantly alter the transmission of shocks and amplify the loss of social welfare under optimal monetary policy, compared to what is observed in standard two-sector models. The distinction between value added and gross output that naturally arises in this context is of key importance to explore the welfare properties of the model economy. A flexible inflation targeting regime is close to optimal only if the central bank balances inflation and value added variability. Otherwise, targeting gross output variability entails a substantial increase in the loss of welfare.

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DO - 10.1016/j.jedc.2011.04.015

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