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Input–output interactions and optimal monetary policy

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Author Info

  • Petrella, Ivan
  • Santoro, Emiliano

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 11 ()
Pages: 1817-1830

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:11:p:1817-1830

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Input–output interactions; Multi-sector models; Optimal monetary policy;

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Cited by:
  1. Ivan PETRELLA & Emiliano SANTORO, 2011. "Inflation dynamics and real marginal costs: new evidence from U.S. manufacturing industries," Center for Economic Studies - Discussion papers ces11.38, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.

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