Monetary Policy with Sectoral Trade-offs

TY - JOUR

T1 - Monetary Policy with Sectoral Trade-offs

AU - Petrella, Ivan

AU - Rossi, Raffaele

AU - Santoro, Emiliano

PY - 2019/1

Y1 - 2019/1

N2 - We formulate a two-sector New Keynesian economy featuring sectoral heterogeneity along three dimensions: price stickiness, consumption goods durability, and the usage of input materials in production. These factors affect both inter-sectoral and intra-sectoral stabilization. We examine the welfare properties of simple rules that react to alternative measures of final goods price inflation. Due to factor demand linkages, the cost of production in one sector is influenced by price-setting in the other sector. Therefore, measures of aggregate inflation weighting sectoral prices based on their relative stickiness do not allow one to keep track of the effective speeds of sectoral price adjustment.

AB - We formulate a two-sector New Keynesian economy featuring sectoral heterogeneity along three dimensions: price stickiness, consumption goods durability, and the usage of input materials in production. These factors affect both inter-sectoral and intra-sectoral stabilization. We examine the welfare properties of simple rules that react to alternative measures of final goods price inflation. Due to factor demand linkages, the cost of production in one sector is influenced by price-setting in the other sector. Therefore, measures of aggregate inflation weighting sectoral prices based on their relative stickiness do not allow one to keep track of the effective speeds of sectoral price adjustment.

KW - Faculty of Social Sciences

KW - Sectoral Heterogeneity

KW - Input-Output Interactions

KW - Interest Rate Rules

U2 - 10.1111/sjoe.12266

DO - 10.1111/sjoe.12266

M3 - Journal article

SN - 0347-0520

VL - 121

SP - 55

EP - 88

JO - Scandinavian Journal of Economics

JF - Scandinavian Journal of Economics

IS - 1

ER -