Optimal Monetary Policy during a Cost-of-Living Crisis
Abstract:
How should monetary policy react to aggregate and sectoral disruptions in a world in which con sumption baskets and hence inflation rates vary across households? We prese nt a multi-sector New Keynesian with generalized, non-homothetic preference s and realistic heterogeneity in wealth, income, and consumption of differe nt goods. Despite its richness, the model is computationally tractable. We highlight two novel wedges emerging in the New Keynesian Phillips Curve, wh ich fluctuate with the distribution of consumption expenditures. We find th at these wedges can have profound implications for the joint dynamics of in flation and the output gap, and hence policy trade-offs. Moreover, shocks a nd policy changes are found to have vastly heterogeneous effects on differe nt households. Finally, we show that there is no universally optimal policy response to distinct sectoral supply shocks, as the appropriate policy rea ction can depend strongly on whether the shock originates in a luxury or a necessity sector.
DTSTAMP:20260606T122548Z DTSTART:20231106T143000Z DTEND:20231106T160000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR