 Optimal monetary policy in production networks with distortionsZhihao Xu and Changhua Yu Journal of Economic Theory, 2025, vol. 225, issue C Abstract: This paper studies optimal monetary policy in a multisector economy with input-output linkages and distortions. Our model incorporates both the supply side and the demand side effects of monetary policy. We derive a tractable sufficient statistic for the supply side effect, which comprises two reallocation channels resulting from substitution between sectoral products for households and firms, and substitution between labor and intermediate inputs in production. The optimal monetary policy induces an inflation bias that stems from both an aggregate wedge and the supply side effect, and targets an inflation index by assigning higher weights to (i) larger sectors, (ii) sectors with stickier prices, and (iii) sectors with less distortions. Our quantitative results indicate that production networks play a crucial role in generating both the supply and demand effects of monetary policy. Keywords: Production networks; Optimal monetary policy; Supply side effect; Phillips curves; Stabilization policy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:225:y:2025:i:c:s0022053125000250 DOI: 10.1016/j.jet.2025.105979 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
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