Han, Kyoung Soo (2008-08). Durable Goods, Price Indexes, and Monetary Policy. Doctoral Dissertation. Thesis uri icon

abstract

  • The dissertation studies the relationship among durable goods, price indexes and monetary policy in two sticky-price models with durable goods. One is a one-sector model with only durable goods and the other is a two-sector model with durable and non-durable goods. In the models with durable goods, the COLI (Cost of Living Index) and the PPI (Producer Price Index) identical to the CPI (Consumer Price Index) measured by the acquisitions approach are distinguished, and the COLI/PPI ratio plays an important rule in monetary policy transmission. The welfare function based on the household utility can be represented by a quadratic function of the quasi-differenced durables-stock gaps and the PPI inflation rates. In the one-sector model, the optimal policy maximizing welfare is to keep the (acquisition) price and the output gap at a constant rate which does not depend on the durability of consumption goods. In the two-sector model with sticky prices, the central bank has only one policy instrument, so it cannot cope with distortions in both sectors. Simulation results show that the PPI is an adequate price index for monetary policy and that a policy of targeting core inflation constructed by putting more weight on prices in the sector producing more durable goods is near optimal.
  • The dissertation studies the relationship among durable goods, price indexes and
    monetary policy in two sticky-price models with durable goods. One is a one-sector
    model with only durable goods and the other is a two-sector model with durable and
    non-durable goods.
    In the models with durable goods, the COLI (Cost of Living Index) and the PPI
    (Producer Price Index) identical to the CPI (Consumer Price Index) measured by the
    acquisitions approach are distinguished, and the COLI/PPI ratio plays an important rule
    in monetary policy transmission. The welfare function based on the household utility can
    be represented by a quadratic function of the quasi-differenced durables-stock gaps and
    the PPI inflation rates. In the one-sector model, the optimal policy maximizing welfare is
    to keep the (acquisition) price and the output gap at a constant rate which does not
    depend on the durability of consumption goods. In the two-sector model with sticky
    prices, the central bank has only one policy instrument, so it cannot cope with distortions
    in both sectors. Simulation results show that the PPI is an adequate price index for
    monetary policy and that a policy of targeting core inflation constructed by putting more
    weight on prices in the sector producing more durable goods is near optimal.

publication date

  • August 2008