Economics Brown Bag Seminar Series - Daeha Cho (The University of Melbourne)

Room 605, Level 6, FBE Building, 111 Barry Street, Carlton

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Title: Relative Price of Investment and a Sectoral Output Gaps Trade-Off

Abstract: We ask whether there is a quantitatively important monetary policy trade-off between consumption and investment stabilization due to changes in the relative price of investment. We find that the trade-off is significant in an estimated two-sector DSGE model of the US economy.  This trade-off occurs mainly because of sector-specific shocks in the goods market. Our result points that while monetary policy can stabilize inefficient fluctuations caused by aggregate shocks effectively, it has very limited role in neutralizing sector-specific shocks in the goods market. We propose how distortionary taxes can be used to improve the trade-off.