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Discretion vs. Timeless Perspective Policy-Making: the Role of Input-Output Interactions

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  • Ivan Petrella

    (Birkbeck, University of London)

  • Raffaele Rossi

    (Lancaster University)

  • Emiliano Santoro

    (Catholic University of Milan and University of Copenhagen)

Abstract

This paper contributes to a recent debate about the structural and institutional conditions under which discretionary monetary policy-making may be superior to timeless perspective. To this end, we formulate an input-output economy in which firms' technology employs both labor and intermediate goods produced by all firms in the economy. Unlike price stickiness, input materials reduce the slope of the New Keynesian Phillips curve, while leaving the policy maker's preference for consumption stabilization unaffected. Strategic complementarities stemming from realistic degrees of input-output interactions greatly amplify the loss of social welfare under timeless perspective, even for small departures of the economy from its steady state. By contrast, price rigidity proves to be ineffective at improving the performance of discretion relative to timeless perspective.

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File URL: http://www.econ.ku.dk/english/research/publications/wp/dp_2012/1220.pdf
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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 12-20.

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Length: 16 pages
Date of creation: 05 Nov 2012
Date of revision:
Handle: RePEc:kud:kuiedp:1220

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Keywords: Input-Output Economy; Monetary Policy; Discretion; Timeless Perspective;

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  1. Dennis, Richard, 2010. "When is discretion superior to timeless perspective policymaking?," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 266-277, April.
  2. Michael Dotsey & Robert G. King, 2005. "Pricing, production, and persistence," Working Papers 05-4, Federal Reserve Bank of Philadelphia.
  3. Alessio Moro, 2009. "Input-Output Structure and New Keynesian Phillips Curve," Rivista di Politica Economica, SIPI Spa, vol. 99(2), pages 145-166, April-Jun.
  4. Miles S. Kimball & Michael Woodford, 1994. "The quantitative analysis of the basic neomonetarist model," Proceedings, Federal Reserve Bank of Cleveland, pages 1241-1289.
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