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Inefficient Relative Price Fluctuations

Daeha Cho and Kwang Hwan Kim
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Daeha Cho: University of Mellbourne
Kwang Hwan Kim: Yonsei Univ

No 2020rwp-171, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: We measure 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, we find that monetary policy faces a quantitatively significant trade-off among the sectoral output gaps and the sectoral price and wage inflation rates. While optimal monetary policy is effective in stabilizing the sectoral inflation rates, it has a limited effect on stabilizing the sectoral output gaps.

Keywords: Relative price of investment; Policy trade-off; Optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E32 E58 E61 (search for similar items in EconPapers)
Pages: 38pages
Date: 2020-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Handle: RePEc:yon:wpaper:2020rwp-171