Household Production, Services and Monetary Policy

August 1, 2012

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Format: Chicago

Constant A Lonkeng Ngouana. Household Production, Services and Monetary Policy, (USA: International Monetary Fund, 2012) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

A distinctive feature of market-provided services is that some of them have close substitutes at home. Households may therefore switch between consuming home and market services in response to changes in the real wage - the opportunity cost of working at home - and changes in the price of market services. In order to analyze and quantify the implications of this trade-off for monetary policy, I embed a household sector into an otherwise standard sticky price DSGE model, which I calibrate to the U.S. economy. The results of the model are twofold. At the sectoral level, 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, lowering the incentive of service sector firms to change their prices. This mechanism endogenously amplifies the real effects of a monetary shock in that sector, unlike in the nondurable goods sector for which households cannot manufacture substitutes at home. At the aggregate level, household production also implies more sluggish prices and a stronger response of real macroeconomic variables to a monetary shock. Some empirical support for this theory is provided.

Subject: Consumption, Economic sectors, Labor, National accounts, Output gap, Prices, Production, Services sector, Sticky prices

Keywords: Consumer services, Consumption, DSGE model, Household production, Marginal utility, Market-service sectors, Monetary policy, Monetary shock, New Keynesian Phillips curve, Nominal interest rate, Nondurable goods, Output gap, Service sector, Service sector firm, Services sector, Sticky prices, WP

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/206
Stock No:

WPIEA2012206
ISBN:

9781475505566
ISSN:

1018-5941

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