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Household Production, Services and Monetary Policy

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  • Constant Lonkeng Ngouana

Abstract

A distinctive feature of market-provided services is that some of them have close substitutes at home. Households may therefore switch between consuming home and market services in response to changes in the real wage - the opportunity cost of working at home - and changes in the price of market services. In order to analyze and quantify the implications of this trade-off for monetary policy, I embed a household sector into an otherwise standard sticky price DSGE model, which I calibrate to the U.S. economy. The results of the model are twofold. At the sectoral level, household production augments the service sector's New Keynesian Phillips curve with a sizable extra component that co-moves negatively with the output gap term, lowering the incentive of service sector firms to change their prices. This mechanism endogenously amplifies the real effects of a monetary shock in that sector, unlike in the nondurable goods sector for which households cannot manufacture substitutes at home. At the aggregate level, household production also implies more sluggish prices and a stronger response of real macroeconomic variables to a monetary shock. Some empirical support for this theory is provided.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/206.

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Length: 40
Date of creation: 01 Aug 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/206

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Keywords: Economic models; External shocks; Services sector; monetary policy; inflation; monetary shocks; monetary economics; inflation dynamics; monetary shock; real output; price level; inflation rate; optimal monetary policy; nominal interest rate; relative prices; expansionary monetary policy; rate of inflation; monetary fund; transmission of monetary policy; monetary authority; relative price; contractionary monetary policy; coefficient on inflation; monetary expansion; real interest rate; neutrality of money; rational expectations;

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  1. Greenwood,J. & Seshadri,A. & Yorukoglu,M., 2002. "Engines of liberation," Working papers 1, Wisconsin Madison - Social Systems.
  2. BOUAKEZ, Hafed & CARDIA Emanuela & RUGE-MURCIA, Francisco, 2005. "The Transmission of Monetary Policy in a Multi-Sector Economy," Cahiers de recherche 2005-16, Universite de Montreal, Departement de sciences economiques.
  3. Uhlig, H.F.H.V.S. & Ravn, M., 1997. "On Adjusting the H-P Filter for the Frequency of Observations," Discussion Paper 1997-50, Tilburg University, Center for Economic Research.
  4. Francisco J. Buera & Joseph P. Kaboski, 2009. "The Rise of the Service Economy," NBER Working Papers 14822, National Bureau of Economic Research, Inc.
  5. Patricia M. Anderson & Phillip B. Levine, 1999. "Child Care and Mothers' Employment Decisions," JCPR Working Papers 64, Northwestern University/University of Chicago Joint Center for Poverty Research.
  6. Tekin, Erdal, 2003. "Child Care Subsidies, Wages, And Employment of Single Mothers," Royal Economic Society Annual Conference 2003 200, Royal Economic Society.
  7. repec:bla:restud:v:72:y:2005:i:1:p:109-133 is not listed on IDEAS
  8. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
  9. Gordon Cleveland & Morley Gunderson & Douglas Hyatt, 1996. "Child Care Costs and the Employment Decision of Women: Canadian Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(1), pages 132-51, February.
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