Petrella, Ivan and Santoro, Emiliano (2011) Input–output interactions and optimal monetary policy. Journal of Economic Dynamics and Control, 35 (11). pp. 1817-1830. doi:10.1016/j.jedc.2011.04.015

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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.

Item Type:	Journal Article
Divisions:	Faculty of Social Sciences > Warwick Business School
Journal or Publication Title:	Journal of Economic Dynamics and Control
Publisher:	Elsevier BV
ISSN:	0165-1889
Official Date:	November 2011
Dates:	Date Event November 2011 Published 6 May 2011 Available 28 April 2011 Accepted
Volume:	35
Number:	11
Page Range:	pp. 1817-1830
DOI:	10.1016/j.jedc.2011.04.015
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access

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