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

  • Ko, Jun-Hyung

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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File URL: http://mpra.ub.uni-muenchen.de/34147/1/MPRA_paper_34147.pdf
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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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  1. 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.
  2. Petrella, Ivan & Santoro, Emiliano, 2010. "Optimal Monetary Policy with Durable Consumption Goods and Factor Demand Linkages," MPRA Paper 21321, University Library of Munich, Germany.
  3. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  4. Robert B. Barsky & Christopher L. House & Miles S. Kimball, 2007. "Sticky-Price Models and Durable Goods," American Economic Review, American Economic Association, vol. 97(3), pages 984-998, June.
  5. Charles T. Carlstrom & Timothy S. Fuerst & Fabio Ghironi, 2002. "Does It Matter (for Equilibrium Determinacy) What Price Index the Central Bank Targets?," Boston College Working Papers in Economics 533, Boston College Department of Economics, revised 07 Feb 2003.
  6. Kevin X. D. Huang & Zheng Liu, 2004. "Inflation targeting: what inflation rate to target?," Working Papers 04-6, Federal Reserve Bank of Philadelphia.
  7. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
  8. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August.
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