 Inefficient relative price fluctuationsDaeha Cho and Kwang Hwan Kim Journal of Economic Dynamics and Control, 2022, vol. 137, issue C Abstract: We measure the extent of inefficient fluctuations in the relative price of investment in the US using an estimated two-sector New Keynesian model. In the presence of these fluctuations, inefficiencies in the economy are summarized by the variation in the following policy objects: the relative price gap, sectoral output gaps, and sectoral price and wage inflation. The welfare-maximizing monetary authority cannot reduce the volatility of the relative price gaps due to nominal rigidity in both sectors. However, it can manage trade-offs among the other policy objects, both across and within sectors. Identifying the nature of shocks that drive the relative price of investment is important for central banks in deciding the optimal weights on sectoral price inflation under the composite inflation targeting rule. This is because the property of trade-offs depends on whether shocks alter the efficient relative price or not. Keywords: Relative price of investment; Policy trade-off; Optimal monetary policy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:137:y:2022:i:c:s0165188922000537 DOI: 10.1016/j.jedc.2022.104348 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
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