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Optimal Monetary Policy during a Cost-of-Living Crisis
How should monetary policy respond to sectoral shocks in a world where consumption baskets vary systematically across households? We present a multi-sector New-Keynesian model with generalized, non-homothetic preferences and inequality. The output gap is governed by a Marginal Consumer Price Index (MCPI), rather than the regular CPI. Policy trade-offs are shaped by a novel wedge in the New-Keynesian Phillips Curve (NKPC). Analytical results and quantitative simulations show that, following negative shocks to necessity sectors, the NKPC is shifted upward, increasing CPI inflation but decreasing the output gap. We find that the optimal policy response is relatively accommodative.
Date:
14 October 2025, 13:15
Venue:
Manor Road Building, Manor Road OX1 3UQ
Venue Details:
Seminar Room A
Speaker:
Vincent Sterk (University College London)
Organising department:
Department of Economics
Part of:
Macroeconomics Seminar
Booking required?:
Not required
Audience:
Members of the University only
Editor:
Edward Valenzano
