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    Input–output interactions and optimal monetary policy

    Petrella, Ivan and Santoro, E. (2011) Input–output interactions and optimal monetary policy. Journal of Economic Dynamics and Control 35 (11), pp. 1817-1830. ISSN 0165-1889.

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    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.

    Metadata

    Item Type: Article
    Keyword(s) / Subject(s): Input–output interactions, Multi-sector models, Optimal monetary policy
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Ivan Petrella
    Date Deposited: 28 May 2013 09:48
    Last Modified: 28 May 2013 09:48
    URI: http://eprints.bbk.ac.uk/id/eprint/6867

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