Optimal Monetary Policy in Production Networks

La’O, Jennifer; Tahbaz-Salehi, Alireza

doi:10.3386/w27464

Cited by 18 publications

(6 citation statements)

References 48 publications

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“…This paper differs from La'O and Tahbaz‐Salehi ( 2019 ) in two main dimensions. First, while La'O and Tahbaz‐Salehi ( 2019 ) focused only on optimal policy, this paper discusses the Phillips curve as well. 3 Second, La'O and Tahbaz‐Salehi ( 2019 ) microfounded price rigidities as arising from incomplete information, and characterized information structures under which monetary policy can replicate the efficient equilibrium.…”

Section: Introductionmentioning

confidence: 84%

Section: Introductionmentioning

confidence: 99%

“…In parallel and independent work, La'O and Tahbaz‐Salehi ( 2019 ) also studied optimal monetary policy in multi‐sector economies with an input‐output network. This paper differs from La'O and Tahbaz‐Salehi ( 2019 ) in two main dimensions. First, while La'O and Tahbaz‐Salehi ( 2019 ) focused only on optimal policy, this paper discusses the Phillips curve as well.…”

Section: Introductionmentioning

confidence: 99%

“…First, while La'O and Tahbaz‐Salehi ( 2019 ) focused only on optimal policy, this paper discusses the Phillips curve as well. 3 Second, La'O and Tahbaz‐Salehi ( 2019 ) microfounded price rigidities as arising from incomplete information, and characterized information structures under which monetary policy can replicate the efficient equilibrium. These results complement the analysis in the current paper, which adopts the Calvo model.…”

Section: Introductionmentioning

confidence: 99%

“…3 3 The modeling of production is also slightly different between the two papers, as this paper allows for arbitrary constant‐returns‐to‐scale production functions, while La'O and Tahbaz‐Salehi ( 2019 ) imposed Cobb–Douglas. This matters for the welfare cost of relative price distortions across sectors, which is proportional to the elasticities of substitution between inputs in production and between consumption goods. …”

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confidence: 99%

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Networks, Phillips Curves, and Monetary Policy

Rubbo

2023

ECTA

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This paper revisits the New Keynesian framework, theoretically and quantitatively, in an economy with multiple sectors and input‐output linkages. Analytical expressions for the Phillips curve and welfare, derived as a function of primitives, show that the slope of all sectoral and aggregate Phillips curves is decreasing in intermediate input shares, while productivity fluctuations endogenously generate an inflation‐output tradeoff—except when inflation is measured according to the novel divine coincidence index. Consistent with the theory, the divine coincidence index provides a better fit in Phillips curve regressions than consumer prices. Monetary policy can no longer achieve the first‐best, resulting in a welfare loss of 2.9% of per‐period GDP under the constrained‐optimal policy, which increases to 3.8% when targeting consumer inflation. The constrained‐optimal policy must tolerate relative price distortions across firms and sectors in order to stabilize the output gap, and it can be implemented via a Taylor rule that targets the divine coincidence index.

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Section: Introductionmentioning

confidence: 84%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

mentioning

confidence: 99%

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Networks, Phillips Curves, and Monetary Policy

Rubbo

2023

ECTA

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Sectoral labor mobility and optimal monetary policy

Cantelmo

Melina

2021

Macroecon. Dynam.

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How should central banks optimally aggregate sectoral inflation rates in the presence of imperfect labor mobility across sectors? We study this issue in a two-sector New-Keynesian model and show that a lower degree of sectoral labor mobility, ceteris paribus, increases the optimal weight on inflation in a sector that would otherwise receive a lower weight. We analytically and numerically find that, with limited labor mobility, adjustment to asymmetric shocks cannot fully occur through the reallocation of labor, thus putting more pressure on wages, causing inefficient movements in relative prices, and creating scope for central bank’ s intervention. These findings challenge standard central banks’ practice of computing sectoral inflation weights based solely on sector size and unveil a significant role for the degree of sectoral labor mobility to play in the optimal computation. In an extended estimated model of the US economy, featuring customary frictions and shocks, the estimated inflation weights imply a decrease in welfare up to 10% relative to the case of optimal weights.

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Stock Market Spillovers via the Global Production Network: Transmission of U.S. Monetary Policy

Giovanni¹,

Hale²

2022

The Journal of Finance

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We quantify the role of global production linkages in explaining spillovers of U.S. monetary policy shocks to stock returns of 54 sectors in 26 countries. We first present a conceptual framework based on a standard open-economy production network model that delivers a spillover pattern consistent with a spatial autoregression (SAR) process. We then use the SAR model to decompose the overall impact of U.S. monetary policy on stock returns into a direct and a network effect. We find that up to 80% of the total impact of U.S. monetary policy shocks on average country-sector stock returns are due to the network effect of global production linkages. We further show that U.S. monetary policy shocks have a direct impact predominantly on U.S. sectors and then propagate to the rest of the world through the global production network. Our results are robust to controlling for correlates of the global financial cycle, foreign monetary policy shocks, and to changes in variable definitions and empirical specifications.

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Optimal Monetary Policy in Production Networks

Cited by 18 publications

References 48 publications

Networks, Phillips Curves, and Monetary Policy

Networks, Phillips Curves, and Monetary Policy

Sectoral labor mobility and optimal monetary policy

Stock Market Spillovers via the Global Production Network: Transmission of U.S. Monetary Policy

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