Monetary Policy with Sectoral Trade-offs

Ivan Petrella; Raffaele Rossi; Emiliano Santoro

doi:10.1111/sjoe.12266

Monetary Policy with Sectoral Trade-offs

Ivan Petrella, Raffaele Rossi, Emiliano Santoro

7 Citations (Scopus)

Abstract

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.

Original language	English
Journal	Scandinavian Journal of Economics
Volume	121
Issue number	1
Pages (from-to)	55-88
ISSN	0347-0520
DOIs	https://doi.org/10.1111/sjoe.12266
Publication status	Published - Jan 2019

Keywords

Faculty of Social Sciences
Sectoral Heterogeneity
Input-Output Interactions
Interest Rate Rules

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title = "Monetary Policy with Sectoral Trade-offs",

abstract = "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.",

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AU - Petrella, Ivan

AU - Rossi, Raffaele

AU - Santoro, Emiliano

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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

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JF - Scandinavian Journal of Economics

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ER -

Monetary Policy with Sectoral Trade-offs

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Keywords

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