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Monetary Policy in an Era of Global Supply Chains

Shang-Jin Wei, Yinxi Xie

Chapter in NBER book NBER International Seminar on Macroeconomics 2019 (2020), Kristin Forbes and Pierre-Olivier Gourinchas, organizers
Conference held June 27–28, 2019
Published in May 2020 by Elsevier, Journal of International Economics, volume 124
in NBER Book Series NBER International Seminar on Macroeconomics

We study the implications of global supply chains for the design of monetary policy, using a small-open economy New Keynesian model with multiple stages of production. Within the family of simple monetary policy rules with commitment, a rule that targets separate producer price inflation at different production stages, in addition to output gap and real exchange rate, is found to deliver a higher welfare level than alternative policy rules. As an economy becomes more open, measured by export share, the optimal weight on the upstream inflation rises relative to that on the final stage inflation. If we have to choose among aggregate price indicators, targeting PPI inflation yields a smaller welfare loss than targeting CPI inflation alone. As the production chain becomes longer, the optimal weight on PPI inflation in the policy rule that targets both PPI and CPI inflation will also rise. A trade cost shock such as a rise in the import tariff can alter the optimal weights on different inflation variables.

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Document Object Identifier (DOI): 10.1016/j.jinteco.2020.103299

This chapter first appeared as NBER working paper w26602, Monetary Policy in an Era of Global Supply Chains, Shang-Jin Wei, Yinxi Xie
 
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