Networks, Phillips Curves, and Monetary Policy

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