Sectoral Heterogeneity in Nominal Rigidities in Korea : Implications for Monetary Policy

This paper documents how the frequency of price changes differs across sectors in Korea and what implications such heterogeneity may have for monetary policy. We find that under heterogeneity: i) monetary policy has larger and more persistent real effects; ii) it is welfare improving to stabilize an alternative (optimal) price index that places disproportionately larger weights on "stickier" sectors, rather than the Consumer Price Index; iii) the central bank, targeting such an alternative index, should move nominal interest rates more slowly, which may provide a justification for the "gradualism" in monetary policy; and iv) the condition for equilibrium determinacy is different. Overall, our results suggest that it is potentially important for the monetary authority to take into account how firms' pricing behaviors differ across sectors in the design of monetary policy