Sectoral Heterogeneity and Monetary Policy

Jonathan Kreamer

American Economic Journal: Macroeconomics, 2022, vol. 14, issue 2, 123-59

Abstract: Since sectors differ in their sensitivity to interest rates, monetary policy produces inefficient sectoral fluctuations. In a model with sectoral heterogeneity, I show that policymakers should weight sectors proportionally to their interest elasticities, account for dynamic demand effects from durable goods, and systematically utilize forward guidance to reduce sectoral volatility. A calibrated model confirms these recommendations and finds that neglecting sectoral volatility produces substantial welfare losses. The best-performing policy rule stabilizes a sectorally weighted measure of inflation, plus lags of past durable inflation.

JEL-codes: E12 E23 E24 E31 E32 E43 E52 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1257/mac.20190248

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