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Optimal Policy and the Sectoral Composition of Output in a New Keynesian Model

Author

Listed:
  • Vahagn Galstyan

    (Institute for International Integration Studies, Trinity College Dublin)

  • Michael Wycherley

    (Institute for International Integration Studies, Trinity College Dublin)

Abstract

The standard New Keynesian model allows the derivation of optimal monetary policy on the assumption that the economy is composed of a single sector. This paper analyses optimal policy on the basis that the economy comprises a number of different sectors. It shows that the composition of output matters, that policy should take into account the source of shocks as well as well as their aggregate magnitude, and that policy tools impacting individual sectors can be welfare improving. If sectoral policy is not adopted, then commitment in tax policy is important in similar ways and for similar reasons to commitment in monetary policy. With sectoral policy, commitment for tax and monetary policies ceases to be important.

Suggested Citation

  • Vahagn Galstyan & Michael Wycherley, 2012. "Optimal Policy and the Sectoral Composition of Output in a New Keynesian Model," The Institute for International Integration Studies Discussion Paper Series iiisdp394, IIIS.
    • Handle: RePEc:iis:dispap:iiisdp394
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Tax policy; Monetary Policy; Multi-sector model; Welfare;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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