Abstract
Since sectors differ in their sensitivity to interest rates, monetary policy produces inefficient sectoral fluctuations. In a model with sectoral heterogeneity, I show that policymakers should weight sectors proportionally to their interest elasticities, account for dynamic demand effects from durable goods, and systematically utilize forward guidance to reduce sectoral volatility. A calibrated model confirms these recommendations and finds that neglecting sectoral volatility produces substantial welfare losses. The best-performing policy rule stabilizes a sectorally weighted measure of inflation, plus lags of past durable inflation. (JEL E12, E23, E24, E31, E32, E43, E52)
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