Household Production, Services and Monetary Policy
IMF Working Papers, August 1, 2012
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Bibliographic details
- Authors: Constant A Lonkeng Ngouana
- Published: August 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475505566.001
Summary
- Some market-provided services have close substitutes produced at home; households can switch between home and market services in response to changes in the real wage and the price of market services.
- The author embeds a household production sector into a standard sticky price DSGE model calibrated to the U.S. economy to analyze implications for monetary policy.
- Main aggregate implications: more sluggish prices and a stronger response of real macroeconomic variables to a monetary shock.
- Empirical support for the theoretical mechanism is provided.
Sectoral-level findings
- Household production augments the service sector's New Keynesian Phillips curve with a sizable extra component that co-moves negatively with the output gap term.
- This extra component lowers the incentive of service sector firms to change their prices.
- The mechanism endogenously amplifies the real effects of a monetary shock in the service sector.
- Contrast with nondurable goods sector: households cannot manufacture substitutes at home for nondurable goods, so the amplification does not occur there.
Aggregate-level findings
- Presence of household production implies more sluggish prices.
- Presence of household production implies a stronger response of real macroeconomic variables to a monetary shock.
Model and methodology
- Framework: sticky price DSGE model with an embedded household production sector.
- Calibration: model calibrated to the U.S. economy.
Policy implications
- Monetary policy transmission differs across sectors depending on the availability of household-produced substitutes:
- Service sector: amplified real effects of monetary shocks and reduced price adjustment incentives for firms.
- Nondurable goods sector: standard transmission without household-production amplification.
- Understanding household production is important for assessing sectoral and aggregate responses to monetary policy.
Empirical evidence
- The paper provides some empirical support for the theoretical predictions derived from the DSGE model (details are provided in the full paper).
Content in this bundle
- Home hours worked