Finance and Economics Discussion Series (FEDS)
Monetary Policy in a Forward-Looking Input-Output Economy
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, which is the minimization of a simple loss function, are studied. Consumer utility losses under alternative simple loss functions are compared, including their robustness to model and shock misperceptions, and parameter uncertainty. Targeting inflation in both consumer and intermediate goods performs better than targeting a single price index; price-level targeting of both consumer and intermediate goods prices performs significantly better. Moreover, targeting prices in both sectors yields superior robustness properties.Full paper (Screen Reader Version)
Keywords: Monetary policy, intermediate goods, inflation targeting, price-level targeting
PDF: Full Paper
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.