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Martedì, 4 dicembre 2018, ore 15.00 -17.00 - (Sala dei Consigli)

Alessandro Cantelmo International Monetary Fund

Sectoral Labor Mobility and Optimal Monetary Policy

Abstract

his paper studies the role of sectoral labor mobility on optimal monetary policy in a two-sector New-Keynesian model. Previous studies have shown that the central bank optimally assigns less weight to inflation in the sector with (i) a lower degree of price stickiness; and/or (ii) smaller economic size; and/or (iii) producing durable goods. This paper shows that a lower degree of sectoral labor mobility, ceteris paribus, increases this optimal weight because it magnifies the volatility of relative prices, especially in the presence of durable goods. On one hand, these findings challenge standard central banks’ practice of computing sectoral inflation weights based solely on economic size. On the other hand, they unveil that the degree of sectoral labor mobility turns out to have a significant role in this computation. In its final part, the paper reports the computation of optimal sectoral inflation weights within an extended model with durable and nondurable goods. The extended model is estimated using U.S. data, and features the customary real and nominal frictions, besides a realistic structure of shocks. The observed inflation weights imply a welfare loss equivalent to a permanent reduction of consumption of about half a percent, relative to the optimal weights.

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