Optimal monetary policy with durable and non-durable goods

Description

"The durable goods sector is much more interest sensitive than the non-durables sector, and these sectoral differences have important implications for monetary policy. In this paper, we perform VAR analysis of quarterly US data and find that a monetary policy innovation has a peak impact on durable expenditures that is roughly five times as large as its impact on non-durable expenditures. We then proceed to formulate and calibrate a two-sector dynamic general equilibrium model that roughly matches the impluse response functions of the data. While the social welfare function involves sector-specific output gaps and inflation rates, we find that performance of the optimal policy rule can be closely approximated by a very simple rule that targets a weighted average of aggregate wage and price inflation rates. In contrast, some commonly-prescribed policy rules (such as strict price inflation targeting and Taylor's rule) perform very poorly in terms of social welfare"--Federal Reserve Board web site.

Subjects

Series Statement

• International finance discussion papers ;
• no. 748
• International finance discussion papers (Online) ;

Links

• URL
• http://www.federalreserve.gov/pubs/ifdp/2002/748/default.htm

Other Editions

• Optimal monetary policy with durable and non-durable goodsEuropean Central Bank2002-01-01
• Optimal monetary policy with durable and non-durable goodsElectronic resourceFederal Reserve Board2002