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

Author

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  • Seula Kim

    (University of Maryland)

  • Jae Won Lee

    (University of Virginia)

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. Under heterogeneity, i) monetary policy has larger and more persistent real effects, ii) stabilizing an alternative (optimal) price index that places disproportionately larger weights on “sticky”sectors rather than the consumer price index is welfare improving, iii) the central bank,targeting such an alternative index, should move nominal interest rates slowly, which may justify “gradualism” in monetary policy, and iv) the condition for equilibrium determinacy is different. The results suggest that the monetary authority must consider how firms’ pricing behaviors differ across sectors in the design of monetary policy.

Suggested Citation

  • Seula Kim & Jae Won Lee, 2020. "Sectoral Heterogeneity in Nominal Rigidities in Korea: Implications for Monetary Policy," Korean Economic Review, Korean Economic Association, vol. 36, pages 59-99.
  • Handle: RePEc:kea:keappr:ker-20200101-36-1-03
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    References listed on IDEAS

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    More about this item

    Keywords

    Heterogeneity; Price Stickiness; Multiple Sectors; DSGE Model; Monetary Policy; Economy of Korea;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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