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Monetary Policy in an Era of Global Supply Chains

Shang-Jin Wei and Yinxi Xie

No 26602, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the implications of global supply chains for the design of monetary policy, using a small-open economy New Keynesian model with multiple stages of production. Within the family of simple monetary policy rules with commitment, a rule that targets separate producer price inflation at different production stages, in addition to output gap and real exchange rate, is found to deliver a higher welfare level than alternative policy rules. As an economy becomes more open, measured by the export share, the optimal weight on the upstream inflation rises relative to that on the final stage inflation. If we have to choose among aggregate price indicators, targeting PPI inflation yields a smaller welfare loss than targeting CPI inflation alone. As the production chain becomes longer, the optimal weight on PPI inflation in the policy rule that targets both PPI and CPI inflation will also rise. A trade cost shock such as a rise in the import tariff can alter the optimal weights on different inflation variables.

JEL-codes: E52 F4 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
Note: ITI ME
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Published as Shang-Jin Wei & Yinxi Xie, 2020. "Monetary policy in an era of global supply chains," Journal of International Economics, .
Published as Monetary Policy in an Era of Global Supply Chains , Shang-Jin Wei, Yinxi Xie. in NBER International Seminar on Macroeconomics 2019 , Forbes and Gourinchas. 2020

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