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Monetary policy with sectoral trade-offs
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Petrella, Ivan, Rossi, Raffaele and Santoro, Emiliano (2019) Monetary policy with sectoral trade-offs. The Scandinavian Journal of Economics, 121 (1). pp. 55-88. doi:10.1111/sjoe.12266 ISSN 0347-0520.
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Official URL: http://doi.org/10.1111/sjoe.12266
Abstract
We formulate a two-sector New Keynesian economy that features sectoral heterogeneity along three main dimensions: price stickiness, consumption goods durability, and the inter-sectoral trade of input materials. The combination of these factors deeply affects inter-sectoral and intra-sectoral stabilization. In this context, we examine the welfare properties of simple rules that adjust the policy rate in response to the output gap and alternative measures of final goods price inflation. Aggregating durable and non-durable goods prices depending on the relative frequency of sectoral price-setting may induce a severe bias. Due to factor demand linkages, the cost of production in one sector is influenced by price-setting in the other sector of the economy. As a result, measures of aggregate inflation that weigh sectoral price dynamics based on the relative degree of price rigidity do not allow the central bank to keep track of the effective speeds of sectoral price adjustment.
Item Type: | Journal Article | ||||||||
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Subjects: | H Social Sciences > HB Economic Theory | ||||||||
Divisions: | Faculty of Social Sciences > Warwick Business School | ||||||||
Library of Congress Subject Headings (LCSH): | Monetary policy -- Mathematical models., Durable goods, Consumer -- Prices -- Econometric models, Service industries -- Mathematical models., Input-output analysis | ||||||||
Journal or Publication Title: | The Scandinavian Journal of Economics | ||||||||
Publisher: | Wiley-Blackwell Publishing Ltd. | ||||||||
ISSN: | 0347-0520 | ||||||||
Official Date: | January 2019 | ||||||||
Dates: |
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Volume: | 121 | ||||||||
Number: | 1 | ||||||||
Page Range: | pp. 55-88 | ||||||||
DOI: | 10.1111/sjoe.12266 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||
Date of first compliant deposit: | 1 March 2017 | ||||||||
Date of first compliant Open Access: | 9 September 2019 |
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