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Monetary Policy with Sectoral Linkages and Durable Goods

Author

Listed:
  • Ivan Petrella

    (Birkbeck, University of London)

  • Raffaele Rossi

    (Lancaster University)

  • Emiliano Santoro

    (Catholic University of Milan and University of Copenhagen)

Abstract

We study the normative implications of a New Keynesian model featuring intersectoral trade of intermediate goods between two sectors that produce durables and non-durables. The interplay between durability and sectoral production linkages fundamentally alters the intersectoral stabilization trade-off as it emerges in otherwise standard two-sector models. We compare the welfare properties of a timeless-perspective monetary policy with the performance of simple instrumental rules that adjust the policy rate in response to the output gap and alternative aggregate measures of final goods price inflation. Aggregating durable and non-durable inflation depending on the relative degrees of sectoral price stickiness may induce a severe bias. Input materials attenuate the response of sectoral inflations to movements in the real marginal costs, so that the effective slopes of the sectoral supply schedules are not properly accounted for by conventional measures of core inflation.

Suggested Citation

  • Ivan Petrella & Raffaele Rossi & Emiliano Santoro, 2012. "Monetary Policy with Sectoral Linkages and Durable Goods," Discussion Papers 12-19, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:1219
    as

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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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