Working Paper

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.

Keywords: Monetary policy; Inflation (Finance); Inflation targeting;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2008

Number: 2008-33