Monetary Policy in Times of Structural Reallocation


Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub, and Ivan Werning. Forthcoming. “Monetary Policy in Times of Structural Reallocation.” Proceedings of the 2021 Jackson Hole Symposium.
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We characterize optimal monetary policy in response to asymmetric shocks that shift demand from one sector to another, a condition arguably faced by many economies emerging from the Covid-19 crisis and its aftermath. We show that the asymmetry naturally manifests itself as an endogenous cost-push shock, breaking divine coincidence, and resulting in inflation optimally exceeding its target despite elevated unemployment. In fact, there is no simple, possibly re-weighted, inflation index that is optimally targeted. When labor is mobile between sectors, the benefits of monetary easing can be even higher, if it translates into wage increases in the expanding sector.
Last updated on 09/24/2021