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Optimal Monetary Policy with Durable Consumption Goods and Factor Demand Linkages

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  • Petrella, Ivan
  • Santoro, Emiliano

Abstract

This paper deals with the implications of factor demand linkages for monetary policy design. We consider a dynamic general equilibrium model with two sectors that produce durable and non-durable goods, respectively. 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 exogenous 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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  • Petrella, Ivan & Santoro, Emiliano, 2010. "Optimal Monetary Policy with Durable Consumption Goods and Factor Demand Linkages," MPRA Paper 21321, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:21321
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    Cited by:

    1. Ko, Jun-Hyung, 2011. "Optimal monetary policy with durable services: user cost versus purchase price," MPRA Paper 34147, University Library of Munich, Germany.
    2. 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.

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    More about this item

    Keywords

    Input-Output Interactions; Durable Goods; Optimal Monetary Policy;
    All these keywords.

    JEL classification:

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

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