Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152613
Authors: 
Erceg, Christopher J.
Levin, Andrew T.
Year of Publication: 
2002
Series/Report no.: 
ECB Working Paper 179
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 strict5 price inflation targeting and Taylor's rule) perform very poorly in terms of social welfare.
JEL: 
E31
E32
E52
Document Type: 
Working Paper

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