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Monetary Policy and Durable Goods

Listed author(s):
  • Miles Kimball

    (University of Michigan)

  • Christopher House

    (University of Michigan)

  • Christoph Boehm

    (University of Michigan)

  • Robert Barsky

    (Department of Economics)

We analyze monetary policy in a New Keynesian model with durable and non-durable goods, each with a separate degree of price rigidity. Durability has profound implications for the business cycle properties of the model and its response to interest rate interventions. Since utility depends on the service flow from the stock of durables, the flow demand for new durables is inherently sensitive to temporary changes in the relevant real interest rate. For a sufficiently long-lived “ideal†durable, we obtain an intriguing variant of the well-known “divine coincidence —in this case, the output gap depends only on inflation in the durable goods sector. We use numerical methods to verify the robustness of this analytical result for a broader class of model parameterizations. We then analyze the optimal Taylor rule for this economy. If the monetary authority places a high weight on stabilizing aggregate inflation then it is optimal to respond to sectoral inflation in direct proportion to the sectoral shares of economic activity. However, if the monetary authority wants to stabilize the aggregate output gap, it puts disproportionate weight on inflation in durable goods prices.

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File URL: https://economicdynamics.org/meetpapers/2016/paper_745.pdf
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Paper provided by Society for Economic Dynamics in its series 2016 Meeting Papers with number 745.

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Date of creation: 2016
Handle: RePEc:red:sed016:745
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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