Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
964897 | Journal of Macroeconomics | 2014 | 15 Pages |
•I embed home production into a New Keynesian model.•The model amplifies impulse responses to monetary and technology shocks.•I show that strict inflation targeting implements the constrained first best.•Deviations from this rule yield quantitatively large welfare losses.
I analyze the consequences of including home production in a New Keynesian model with staggered price setting. Home production amplifies responses to technology and monetary policy shocks. Compared to a model without home production, the model generates close to twice the output response to a monetary policy shock. I consider the implications of several nominal interest rate rules and show that a traditional Taylor rule lacks its usual attractive properties. Alternatively, strict inflation targeting implements the constrained efficient allocation.