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

Author Info

Listed author(s):
  • 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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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
Handle: RePEc:kud:kuiedp:1220
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Keywords: Input-Output Economy; Monetary Policy; Discretion; Timeless Perspective;

Find related papers by 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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  1. Michael Dotsey & Robert G. King, 2006. "Pricing, Production, and Persistence," Journal of the European Economic Association, MIT Press, vol. 4(5), pages 893-928, 09.
  2. Hafedh Bouakez & Emanuela Cardia & Francisco J. Ruge-Murcia, 2009. "The Transmission Of Monetary Policy In A Multisector Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1243-1266, November.
  3. Dennis, Richard, 2010. "When is discretion superior to timeless perspective policymaking?," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 266-277, April.
  4. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-1277, November.
  5. 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.
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Cited by:

  1. Hahn, Volker, 2014. "An argument in favor of long terms for central bankers," Economics Letters, Elsevier, vol. 122(2), pages 132-135.

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