Monetary Policy with Sectoral Linkages and Durable Goods

We study the normative implications of a New Keynesian model featuring in-tersectoral trade of intermediate goods between two sectors that produce durables and non-durables. The interplay between durability and sectoral production link-ages fundamentally alters the intersectoral stabilization trade-o ¤ as it emerges in otherwise standard two-sector models. We compare the welfare properties of a timeless-perspective monetary policy with the performance of simple instrumen-tal rules that adjust the policy rate in response to the output gap and alternative aggregate measures of \u85nal goods price ination. Aggregating durable and non-durable ination depending on the relative degrees of sectoral price stickiness may induce a severe bias. Input materials attenuate the response of sectoral inations to movements in the real marginal costs, so that the e¤ective slopes of the sectoral supply schedules are not properly accounted for by conventional measures of core ination