Monetary Policy with Sectoral Trade-offs

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We formulate a two-sector New Keynesian economy featuring sectoral heterogeneity along three dimensions: price stickiness, consumption goods durability, and the usage of input materials in production. These factors affect both inter-sectoral and intra-sectoral stabilization. We examine the welfare properties of simple rules that react to alternative measures of final goods price inflation. Due to factor demand linkages, the cost of production in one sector is influenced by price-setting in the other sector. Therefore, measures of aggregate inflation weighing sectoral prices based on their relative stickiness do not allow to keep track of the effective speeds of sectoral price adjustment.
Original languageEnglish
JournalScandinavian Journal of Economics
Issue number1
Pages (from-to)55-88
Publication statusPublished - 2019

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