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Input–output interactions and optimal monetary policy

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  • 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.

Suggested Citation

  • Petrella, Ivan & Santoro, Emiliano, 2011. "Input–output interactions and optimal monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 35(11), pages 1817-1830.
  • Handle: RePEc:eee:dyncon:v:35:y:2011:i:11:p:1817-1830
    DOI: 10.1016/j.jedc.2011.04.015
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    Cited by:

    1. Cantelmo, Alessandro & Melina, Giovanni, 2018. "Monetary policy and the relative price of durable goods," Journal of Economic Dynamics and Control, Elsevier, vol. 86(C), pages 1-48.
    2. Petrella, Ivan & Rossi, Raffaele & Santoro, Emiliano, 2014. "Discretion vs. timeless perspective under model-consistent stabilization objectives," Economics Letters, Elsevier, vol. 122(1), pages 84-88.
    3. Petrella, Ivan & Rossi, Rafaelle & Santoro, Emilio, 2017. "Monetary Policy with Sectoral Trade-offs," EMF Research Papers 14, Economic Modelling and Forecasting Group.
    4. Petrella, Ivan & Santoro, Emiliano, 2012. "Inflation dynamics and real marginal costs: New evidence from U.S. manufacturing industries," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 779-794.
    5. Gong, Liutang & Wang, Chan & Zou, Heng-fu, 2016. "Optimal monetary policy with international trade in intermediate inputs," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 140-165.

    More about this item

    Keywords

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

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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