Sectoral Heterogeneity in Nominal Rigidities in Korea: Implications for Monetary Policy

39 Pages Posted: 6 May 2018

See all articles by Chung Gu Chee

Chung Gu Chee

The Bank of Korea

Seul A Kim

University of Maryland

Jae Won Lee

University of Virginia - Department of Economics

Date Written: April 18, 2018

Abstract

This paper documents how the frequency of price changes differs across sectors in Korea and what implications such heterogeneity may have for monetary policy. We find that under heterogeneity: i) monetary policy has larger and more persistent real effects; ii) it is welfare improving to stabilize an alternative (optimal) price index that places disproportionately larger weights on "stickier" sectors, rather than the Consumer Price Index; iii) the central bank, targeting such an alternative index, should move nominal interest rates more slowly, which may provide a justification for the "gradualism" in monetary policy; and iv) the condition for equilibrium determinacy is different. Overall, our results suggest that it is potentially important for the monetary authority to take into account how firms' pricing behaviors differ across sectors in the design of monetary policy.

Keywords: monetary policy, economy of Korea, heterogeneity, price stickiness, multiple sectors, DSGE model

JEL Classification: C51, E13, E31, E32, E44, J20

Suggested Citation

Gu Chee, Chung and Kim, Seul A and Lee, Jae Won, Sectoral Heterogeneity in Nominal Rigidities in Korea: Implications for Monetary Policy (April 18, 2018). Available at SSRN: https://ssrn.com/abstract=3165122 or http://dx.doi.org/10.2139/ssrn.3165122

Chung Gu Chee

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

Seul A Kim

University of Maryland ( email )

College Park
College Park, MD 20742
United States

Jae Won Lee (Contact Author)

University of Virginia - Department of Economics ( email )

237 Monroe Hall
P.O. Box 400182
Charlottesville, VA 22904-418
United States

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