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Monetary Policy in a Forward-Looking Input-Output Economy

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  • BRAD E. STRUM

Abstract

This paper examines the implications for monetary policy of sticky prices in both final and intermediate goods in a New Keynesian model. Both optimal policy under commitment and discretionary policy under simple loss functions are studied. Household utility losses under alternative loss functions are compared; additionally, the robustness of policy performance to model and shock misperceptions and parameter uncertainty is examined. Targeting inflation in both consumer and intermediate goods performs better than targeting inflation in one sector; targeting price levels of both final and intermediate goods performs significantly better. Moreover, targeting price levels in both sectors yields superior robustness properties. Copyright (c) 2009 The Ohio State University No claim to original US government works.

Suggested Citation

  • Brad E. Strum, 2009. "Monetary Policy in a Forward-Looking Input-Output Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 619-650, June.
    • Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:4:p:619-650
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    Cited by:

    1. Cantelmo, Alessandro & Melina, Giovanni, 2023. "Sectoral labor mobility and optimal monetary policy," Macroeconomic Dynamics, Cambridge University Press, vol. 27(1), pages 1-26, January.
    2. Brad E. Strum, 2010. "Inflation persistence, backward-looking firms, and monetary policy in an input-output economy," Finance and Economics Discussion Series 2010-55, Board of Governors of the Federal Reserve System (U.S.).
    3. Ivan Petrella & Raffaele Rossi & Emiliano Santoro, 2019. "Monetary Policy with Sectoral Trade‐Offs," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(1), pages 55-88, January.
    4. N. Gregory Mankiw & Ricardo Reis, 2003. "What Measure of Inflation Should a Central Bank Target?," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1058-1086, September.
    5. Petrella, Ivan & Santoro, Emiliano, 2011. "Input–output interactions and optimal monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 35(11), pages 1817-1830.
    6. Wei, Shang-Jin & Xie, Yinxi, 2020. "Monetary policy in an era of global supply chains," Journal of International Economics, Elsevier, vol. 124(C).
    7. Ida, Daisuke, 2020. "Sectoral inflation persistence and optimal monetary policy," Journal of Macroeconomics, Elsevier, vol. 65(C).
    8. Ivan Petrella & Raffaele Rossi & Emiliano Santoro, 2012. "Monetary Policy with Sectoral Linkages and Durable Goods," Discussion Papers 12-19, University of Copenhagen. Department of Economics.
    9. Shang-Jin Wei & Yinxi Xie, 2018. "The Wedge of the Century: Understanding a Divergence between CPI and PPI Inflation Measures," NBER Working Papers 24319, National Bureau of Economic Research, Inc.
    10. Ivan Petrella & Emiliano Santoro, "undated". "Optimal Monetary Policy with Durable Consumption Goods and Factor Demand Linkages," EPRU Working Paper Series 2009-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised May 2009.
    11. repec:wrk:wrkemf:14 is not listed on IDEAS

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