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Input–output interactions and optimal monetary policy
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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 ISSN 0165-1889.
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Official URL: http://dx.doi.org/10.1016/j.jedc.2011.04.015
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 | ||||||||
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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: |
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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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