Optimal monetary policy with international trade in intermediate inputs
Liutang Gong,
Chan Wang and
Heng-Fu Zou ()
No 604, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics
Abstract:
This paper examines optimal monetary policy in a two-country New Keynesian model with international trade in intermediate inputs. We derive the loss function of a cooperative monetary policymaker and ï¬ nd that the optimal monetary policy must target intermediategoods price inflation rates, ï¬ nal-goods price inflation rates, ï¬ nalgoods output gaps, and relative-price gaps. We use the welfare loss under the optimal monetary policy as a benchmark to evaluate the welfare implications of three Taylor-type monetary policy rules. A main ï¬ nding is that the degree of price stickiness at the stage of intermediate-goods production is a key factor to determine which policy rule should be followed. Speciï¬ cally, when the degree of price stickiness at the stage of intermediate-goods production is high, the policymaker should follow intermediate-goods PPI-based Taylor rule, whereas CPI-based Taylor rule should be followed when the degree of price stickiness at the stage of intermediate-goods production is intermediate or low.
Keywords: Vertical production and trade; Optimal monetary policy; Inflation targeting; Welfare (search for similar items in EconPapers)
JEL-codes: E5 F3 F4 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2016-07
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)
Downloads: (external link)
http://down.aefweb.net/WorkingPapers/w604.pdf (application/pdf)
Related works:
Journal Article: Optimal monetary policy with international trade in intermediate inputs (2016) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:cuf:wpaper:604
Access Statistics for this paper
More papers in CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics Contact information at EDIRC.
Bibliographic data for series maintained by Qiang Gao ().