Input–output interactions and optimal monetary policy

Ivan Petrella and Emiliano Santoro

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 11, 1817-1830

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.

Keywords: Input–output interactions; Multi-sector models; Optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E23 E32 E52 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:11:p:1817-1830

DOI: 10.1016/j.jedc.2011.04.015

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