Monetary Policy in a Forward-Looking Input-Output Economy
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, 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.
Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. Monetary Policy in a Forward-Looking Input-Output Economy Brad E. Strum 2008-33 NOTE: Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the Finance and Economics Discussion Series (other than acknowledgement) should be cleared with the author(s) to protect the tentative character of these papers.
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dezilau n etaR 3. 4 9 N N o at m u i ra n l a l R I a n t t e e r o e f s I t n R te a r t e e st nA 3.8 Real Interest Rate 0 5 10 15 20 0.5 dezilau n etaR 0 Final Inflation nA -0.5 Intm. Inflation 0 5 10 15 20 0.5 tnecreP n oitaiveD-0.5 0 F M R e P P l r a i r t c i i c e v e e In I n P d d r e i e c x x e Gap 0 5 10 15 20 0.1 tnecreP n oitaiveD -0.1 0 O Re u a t l p I u n t t e G re a s p t Rate Gap -0.2 0 5 10 15 20 Quarters
4 dezilau n etaR 3.8 N N o at m u i ra n l a l I n I t n e t r e e r s e t s R t R at a e te nA 3.6 Real Interest Rate 0 5 10 15 20 0.5 dezilau n etaR 0 Final Inflation nA Intm. Inflation -0.5 0 5 10 15 20 F Price Index tnecreP n oitaiveD 0. 0 5 M Re P la r t i i c v e e I n P d ri e c x e -0.5 0 5 10 15 20 0.2 tnecreP n oitaiveD 0. 0 1 O Re u a t l p I u n t t e G re a s p t Rate Gap -0.1 0 5 10 15 20 Quarters
12 Nominal Interest Rate dezilau n etaR 1 6 8 0 N Re a a tu l r I a n l t e R r a es te t R of a t I e nterest nA 4 0 5 10 15 20 6 dezilau n etaR 2 4 F In i t n m al . I I n n f f l l a a t t i i o o n n nA 0 -2 0 5 10 15 20 2 F Price Index tnecreP n oitaiveD 0 M Re P la r t i i c v e e I n P d ri e c x e Gap -2 0 5 10 15 20 2 tnecreP n oitaiveD -2 0 O Re u a t l p I u n t t e G re a s p t Rate Gap -4 0 5 10 15 20 Quarters
15 dezilau n etaR 10 N N Re o a a t m u l i r I a n n l a t e l I n r I e t n s e t t r e e R r s e t a s t R t e R at a e te nA 5 0 5 10 15 20 4 dezilau n nA etaR 0 2 F In i t n m al . I I n n f f l l a a t t i i o o n n -2 0 5 10 15 20 1.5 F Price Index tnecreP n oitaiveD 0. 0 1 5 M Re P la r t i i c v e e I n P d ri e c x e -0.5 0 5 10 15 20 2 tnecreP n oitaiveD -2 0 O Re u a t l p I u n t t e G re a s p t Rate Gap -4 0 5 10 15 20 Quarters
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50 = PD = CIT = PIT = DIT s e vo b a tn so L tn e m 3 4 0 0 e ctim20 rem Po C10 0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 50 = PD = CPT = PPT = DPT s e vo b a tn so L tn e m 3 4 0 0 e ctim20 rem Po C10 0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
80 = PD = CIT = PIT = DIT s e vo b a tn so L tn e m4 6 0 0 e ctim re P m o 20 C 0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 80 = PD = CPT = PPT = DPT s e vo b a tn so L tn e m4 6 0 0 e ctim re P m o 20 C 0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
50 = PD = CIT = PIT = DIT s e vo b a tn so L tn e m 3 4 0 0 e ctim20 rem Po C10 0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 50 = PD = CPT = PPT = DPT s e vo b a tn so L tn e m 3 4 0 0 e ctim20 rem Po C10 0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
50 = PD = CIT = PIT = DIT s e vo b a tn so L tn e m 3 4 0 0 e ctim20 rem Po C10 0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 50 = PD = CPT = PPT = DPT s e vo b a tn so L tn e m 3 4 0 0 e ctim20 rem Po C10 0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Cite this document
Brad E. Strum (2008). Monetary Policy in a Forward-Looking Input-Output Economy (FEDS 2008-33). Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series. https://whenthefedspeaks.com/doc/feds_2008-33
@techreport{wtfs_feds_2008_33,
author = {Brad E. Strum},
title = {Monetary Policy in a Forward-Looking Input-Output Economy},
type = {Finance and Economics Discussion Series},
number = {2008-33},
institution = {Board of Governors of the Federal Reserve System},
year = {2008},
url = {https://whenthefedspeaks.com/doc/feds_2008-33},
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, 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.},
}