Discretion vs. Timeless Perspective Policy-Making: the Role of Input-Output Interactions

Ivan Petrella, Raffaele Rossi and Emiliano Santoro

No 12-20, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: This paper contributes to a recent debate about the structural and institutional conditions under which discretionary monetary policy-making may be superior to timeless perspective. To this end, we formulate an input-output economy in which firms' technology employs both labor and intermediate goods produced by all firms in the economy. Unlike price stickiness, input materials reduce the slope of the New Keynesian Phillips curve, while leaving the policy maker's preference for consumption stabilization unaffected. Strategic complementarities stemming from realistic degrees of input-output interactions greatly amplify the loss of social welfare under timeless perspective, even for small departures of the economy from its steady state. By contrast, price rigidity proves to be ineffective at improving the performance of discretion relative to timeless perspective.

Keywords: Input-Output Economy; Monetary Policy; Discretion; Timeless Perspective (search for similar items in EconPapers)
JEL-codes: E23 E32 E52 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2012-11-05
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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