Discretion vs. Timeless Perspective Policy-Making: The Role of Input-Output Interactions

17 Pages Posted: 16 Nov 2012

See all articles by Ivan Petrella

Ivan Petrella

University of Warwick; Centre for Economic Policy Research (CEPR)

Raffaele Rossi

Lancaster University

Emiliano Santoro

University of Copenhagen - Department of Economics

Date Written: November 5, 2012

Abstract

This paper contributes to a recent debate about the structural and institutional conditions under which discretionary monetary policy-making may be superior to timeless perspective. To this end, we formulate an input-output economy in which firms' technology employs both labor and intermediate goods produced by all firms in the economy. Unlike price stickiness, input materials reduce the slope of the New Keynesian Phillips curve, while leaving the policy maker's preference for consumption stabilization unaffected. Strategic complementarities stemming from realistic degrees of input-output interactions greatly amplify the loss of social welfare under timeless perspective, even for small departures of the economy from its steady state. By contrast, price rigidity proves to be ineffective at improving the performance of discretion relative to timeless perspective.

Keywords: Input-Output Economy, Monetary Policy, Discretion, Timeless Perspective

JEL Classification: E23, E32, E52

Suggested Citation

Petrella, Ivan and Rossi, Raffaele and Santoro, Emiliano, Discretion vs. Timeless Perspective Policy-Making: The Role of Input-Output Interactions (November 5, 2012). Univ. of Copenhagen Dept. of Economics Discussion Paper No. 12-20, Available at SSRN: https://ssrn.com/abstract=2175612 or http://dx.doi.org/10.2139/ssrn.2175612

Ivan Petrella

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Raffaele Rossi

Lancaster University ( email )

Emiliano Santoro (Contact Author)

University of Copenhagen - Department of Economics ( email )

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

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