Optimal Monetary Policy during a Cost-of-Living Crisis
How should monetary policy react to aggregate and sectoral disruptions in a world in which consumption baskets and hence inflation rates vary across households? We present a multi-sector New Keynesian with generalized, non-homothetic preferences and realistic heterogeneity in wealth, income, and consumption of different goods. Despite its richness, the model is computationally tractable. We highlight two novel wedges emerging in the New Keynesian Phillips Curve, which fluctuate with the distribution of consumption expenditures. We find that these wedges can have profound implications for the joint dynamics of inflation and the output gap, and hence policy trade-offs, in particular following sectoral shocks. Moreover, shocks and policy changes are found to have vastly heterogeneous effects on different households. Finally, study optimal policy and find large deviations from standard interest rate rules. The model is applied to the United Kingdom, and disciplined by micro data from the Living Costs and Food survey.
Date: 16 May 2023, 13:15 (Tuesday, 4th week, Trinity 2023)
Venue: Manor Road Building, Manor Road OX1 3UQ
Venue Details: Room A or https://zoom.us/j/99960790792?pwd=L01NVnBQcGlqMVdQMHBiWDN3YmFMZz09
Speaker: Vincent Sterk (University College London)
Organising department: Department of Economics
Part of: Seminar in Macroeconomics
Booking required?: Not required
Audience: Members of the University only
Editor: Daria Ihnatenko