Article ID Journal Published Year Pages File Type
964897 Journal of Macroeconomics 2014 15 Pages PDF
Abstract

•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.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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