Ko, Jun-Hyung (2011): Optimal monetary policy with durable services: user cost versus purchase price.
Download (319kB) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||Optimal monetary policy with durable services: user cost versus purchase price|
|Keywords:||Durables; User cost; Price-rent ratio; Optimal monetary policy|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
|Depositing User:||Jun-Hyung Ko|
|Date Deposited:||17. Oct 2011 04:56|
|Last Modified:||16. Feb 2013 05:19|
Aoki, K., (2001): ``Optimal Monetary Policy Response to Relative Price Changes," Journal of Monetary Economics, 48: pages 55-80.
Aoki, Proudman, and Vlieghe (2004): ``House prices, Consumption, and Monetary policy: a Financial Accelerator Approach,'' Journal of Financial Intermediation, 13, pages 414-435.
Barski R., C. House and M. Kimball (2006): ``Sticky Price Models and Durable Goods,'' American Economic Review, American Economic Association, 97(3), pages 984-998.
Calza, Monacelli, and Stracca (2007): ``Mortgage Markets, Collateral Constraints, and Monetary Policy: Do Institutional Factors Matter?,'' CFS Working Paper Series, (Frankfurt: Center for Financial Studies)
Campbell J. and Z. Hercowitz (2005): ``The Role of Collateralized Household Debt in Macroeconomic Stabilization,'' NBER, working paper 11330.
Carlstrom, C. T. and T. S. Fuerst, Fabio Ghironi, and Kolver Hernandez. (2006): ``Relative Price Dynamics and the Aggregate Economy," Manuscript.
Carlstrom, C. T. and T. S. Fuerst (2006): ``Does It Matter (for Equilibrium Determinacy) What Price Index the Central Bank Targets?," Journal of Economic Theory 128, pages 214-231.
Clarida, R., Gali, J., and Gertler, M., (1999): ``The Science of Monetary policy: A New Keynesian Perspective," Journal of Economic Literature, 37, pages 1661-1707.
Clarida, R., Gali, J., and Gertler, M. (2002): ``A Simple Framework For International Monetary Policy Analysis," Journal of Monetary Economics, 49, pages 879-904.
Erceg, C., D. Henderson, and A. Levin. (2000): ``Optimal Monetary Policy with Staggered Wage and Price Contracts," Journal of Monetary Economics, 46, pages 281-313.
Erceg, C., and A. Levin. (2006): ``Optimal Monetary Policy with Durable Consumption Goods," Journal of Monetary Economics, 53, pages 1341-1359.
Genesove, D. (2003): ``The Nominal Regidity of Apartment Rents," The Review of Economics and Statistics, 85 (4), pages844-853.
Huang, K., and Z. Liu. (2005): ``Inflation Targeting: What Inflation Rate to Target?�," Journal of Monetary Economics, 52, pages 1435-1462.
Ko, J. H., (2011): ``Productivity Shocks and Housing Market Inflations in New Keynesian Models," mimeo.
Mankiw, N. Gregory, and R. Reis. (2003): ``What Measure of Inflation Should a Central Bank Target?,�" Journal of the European Economic Association, 1: pages 1058-1086.
Monacelli, T., (2007): ``Optimal Monetary Policy with Collateralized Household Debt and Borrowing Constraints," Asset Prices and Monetary Policy, University of Chicago Press , in Campbell, John Y. (ed.)
Monacelli, T., (2009): ``New Keynesian Models, Durable Goods, and Collateral Constraints," Journal of Monetary Economics, 56:2.
Petrella, I. and S. Emiliano, (2010): ``Optimal Monetary Policy with Durable Consumption Goods and Factor Demand Linkages," MPRA Paper 21321, University Library of Munich, Germany
item Rotemberg, J. J. (1982): ``Sticky prices in the United States," Journal of Political Economy 99, pages 1187-1211.
Lucas, Robert E. (1978): ``Asset Prices in an Exchange Economy," Econometrica, 46, pages 1429–1445.
Shimizu, C., K. G. Nishimura and T. Watanabe (2010), ``Residential Rents and Price Rigidity: Micro Structure and Macro Consequences," Journal of the Japanese and International Economics, 24 (1), pages 282-299.
Wolman, Alexander L. (2008): ``The Optimal Rate of Inflation with Trending Relative Prices," Manuscript, Federal Reserve Bank of Richmond.
Woodford, Michael (2003): Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press.