Optimal monetary policy with durable and non-durable goods

Christopher John Erceg and Andrew Theo Levin ()

No 748, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: 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 impulse 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.

Keywords: Monetary policy; Durable goods, Consumer (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon
Date: 2002
View list of references View citations in EconPapers

Downloads: (external link)
http://www.federalreserve.gov/pubs/ifdp/2002/748/default.htm (text/html)
http://www.federalreserve.gov/pubs/ifdp/2002/748/ifdp748.pdf (application/pdf)

Related works:
Working Paper: Optimal Monetary Policy with Durable and Non-Durable Goods (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:fip:fedgif:748

Ordering information: This working paper can be ordered from
http://www.federalreserve.gov/pubs/ifdp/order.htm

Access Statistics for this paper

More papers in International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)
Contact information at EDIRC.
Series data maintained by Diane Rosenberger ().