Monetary Policy with Sectoral Linkages and Durable Goods

56 Pages Posted: 16 Nov 2012

See all articles by Ivan Petrella

Ivan Petrella

University of Warwick; Centre for Economic Policy Research (CEPR)

Raffaele Rossi

Lancaster University

Emiliano Santoro

University of Copenhagen - Department of Economics

Date Written: October 11, 2012

Abstract

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

Petrella, Ivan and Rossi, Raffaele and Santoro, Emiliano, Monetary Policy with Sectoral Linkages and Durable Goods (October 11, 2012). Univ. of Copenhagen Dept. of Economics Discussion Paper No. 12-19. Available at SSRN: https://ssrn.com/abstract=2175610 or http://dx.doi.org/10.2139/ssrn.2175610

Ivan Petrella

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Raffaele Rossi

Lancaster University ( email )

Emiliano Santoro (Contact Author)

University of Copenhagen - Department of Economics ( email )

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

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