Optimal monetary policy with durable and non-durable goods
By: Christopher J. Erceg, Andrew T. Levin.
Contributors: Levin, Andrew T.
Series: International finance discussion papers ;; no. 748; International finance discussion papers (Online) ;; no. 748.
Publisher: Federal Reserve Board
Published: 2002
Place of publication: Washington, D.C
Language: eng
Format: Electronic resource
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.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 10/7/2004.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.