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Optimal monetary policy with durable services: user cost versus purchase price

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  • Ko, Jun-Hyung
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    Abstract

    This paper investigates the inflation rate that should be set as the target for the central bank. To this end, we develop a two-sector economy model in the existence of long-lived durables. In contrast to recent studies that have been conducted on how monetary policy can affect the role of durable goods, which examine only the production sector, we introduce a service market. Accordingly, we can endogenously derive the traditional user cost equation and the price-rent ratio. Our main findings are as follows: First, even in cases where both service and production sectors are equally sticky, the user cost is more important than the purchase price, from the perspective of welfare loss. Second, in contrast to the situation in the economy that includes only nondurables, a temporary shock persistently influences output fluctuations. However, this does not mean that welfare loss increases as the degree of durability increases. Third, welfare is found to be a strictly increasing function of durability.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34147.

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    Date of creation: Sep 2011
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    Handle: RePEc:pra:mprapa:34147

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    Related research

    Keywords: Durables; User cost; Price-rent ratio; Optimal monetary policy;

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    1. Charles T. Carlstrom & Timothy S. Fuerst & Fabio Ghironi, 2002. "Does it matter (for equilibrium determinacy) what price index the central bank targets?," Working Paper 0202, Federal Reserve Bank of Cleveland.
    2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    3. Petrella, Ivan & Santoro, Emiliano, 2010. "Optimal Monetary Policy with Durable Consumption Goods and Factor Demand Linkages," MPRA Paper 21321, University Library of Munich, Germany.
    4. Robert Barsky & Christopher L. House & Miles Kimball, 2005. "Sticky Price Models and Durable Goods," Macroeconomics, EconWPA 0501031, EconWPA.
    5. Kevin X. D. Huang & Zheng Liu, 2004. "Inflation targeting: what inflation rate to target?," Working Papers 04-6, Federal Reserve Bank of Philadelphia.
    6. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 640, Board of Governors of the Federal Reserve System (U.S.).
    7. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, Elsevier, vol. 48(1), pages 55-80, August.
    8. Shimizu, Chihiro & Nishimura, Kiyohiko G. & Watanabe, Tsutomu, 2010. "Residential rents and price rigidity: Micro structure and macro consequences," Journal of the Japanese and International Economies, Elsevier, vol. 24(2), pages 282-299, June.
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    Cited by:
    1. Ko, Jun-Hyung, 2011. "Productivity shocks and housing market inflations in new Keynesian models," MPRA Paper 33848, University Library of Munich, Germany.

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