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Optimal Monetary Policy Under Sectoral Interconnections

Author

Listed:
  • Swapnil Singh

    (Bank of Lithuania
    Kaunas University of Technology)

  • Roel Beetsma

    (University of Amsterdam
    European Fiscal Board
    CEPR
    CESifo)

Abstract

We explore the role of intersectoral factor demand linkages for the design of optimal monetary policy. A two-sector new-Keynesian model is developed in which the sectors are connected through factor demand linkages. Moreover, they differ in price stickiness. We obtain two important results: first, the presence of factor demand linkages causes amplification effects in resource mis-allocation and, hence, the concern for price stability becomes relatively more important. Second, the optimal price index is not the same as the aggregate price index, although it does not directly depend on the factor demand linkages themselves. Furthermore, based on the micro-founded loss function we derive a policy rule that implements the optimal allocation.

Suggested Citation

  • Swapnil Singh & Roel Beetsma, 2018. "Optimal Monetary Policy Under Sectoral Interconnections," De Economist, Springer, vol. 166(3), pages 309-336, September.
    • Handle: RePEc:kap:decono:v:166:y:2018:i:3:d:10.1007_s10645-018-9327-x
    DOI: 10.1007/s10645-018-9327-x
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    More about this item

    Keywords

    Optimal monetary policy; Factor demand linkages; Price stickiness; Loss function; Optimal policy rule;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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