Monetary Policy with Sectoral Linkages and Durable Goods
56 Pages Posted: 16 Nov 2012
Date Written: October 11, 2012
We study the normative implications of a New Keynesian model featuring intersectoral trade of intermediate goods between two sectors that produce durables and non-durables. The interplay between durability and sectoral production linkages fundamentally alters the intersectoral stabilization trade-off as it emerges in otherwise standard two-sector models. We compare the welfare properties of a timeless-perspective monetary policy with the performance of simple instrumental rules that adjust the policy rate in response to the output gap and alternative aggregate measures of final goods price inflation. Aggregating durable and non-durable inflation depending on the relative degrees of sectoral price stickiness may induce a severe bias. Input materials attenuate the response of sectoral inflations to movements in the real marginal costs, so that the effective slopes of the sectoral supply schedules are not properly accounted for by conventional measures of core inflation.
Keywords: Durable Goods, Input-Output Interactions, Monetary Policy, Interest Rate Rules
JEL Classification: E23, E32, E52
Suggested Citation: Suggested Citation