Discretion vs. Timeless Perspective Policy-Making: The Role of Input-Output Interactions
17 Pages Posted: 16 Nov 2012
Date Written: November 5, 2012
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: Suggested Citation