## Household Production, Services and Monetary Policy

_IMF Working Papers, August 1, 2012_

## Source details

**Canonical URL:** [Household Production, Services and Monetary Policy](https://www.imf.org/en/publications/wp/issues/2016/12/31/household-production-services-and-monetary-policy-26194)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/31/household-production-services-and-monetary-policy-26194/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/31/household-production-services-and-monetary-policy-26194/index.json)
- [Bundle manifest](/en/publications/wp/issues/2016/12/31/household-production-services-and-monetary-policy-26194/bundle-manifest.json)

## 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**
  - [Home hours worked (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12206.pdf.md){rel="alternate" type="text/markdown"}
  - [Home hours worked (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12206.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/household-production-services-and-monetary-policy-26194_