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This paper investigates optimized monetary policy rules in the presence of government intervention to stabilize prices of certain categories of goods and services. The paper estimates a small-scale, structural equilibrium model with a sticky-price sector and a subsidized price sector for a large number of countries using Bayesian methods. The main result of this paper is that strict headline inflation targeting could be outperformed by sectoral inflation targeting, output gap stabilization, or a combination of these. In addition, several country cases exhibit lower performance of both headline and core inflation stabilization, the two most common policies in modern central banks' practices. For practical monetary policy design, we numerically identify country specific thresholds for the degree of government intervention in price setting under which core inflation targeting turns out to be the optimal choice in the context of implementable Taylor rules.

Subsidies --- Prices --- Monetary policy --- Econometric models. --- Government policy --- Commercial products --- Commodity prices --- Justum pretium --- Price theory --- Consumption (Economics) --- Cost --- Costs, Industrial --- Money --- Cost and standard of living --- Supply and demand --- Value --- Wages --- Willingness to pay --- Business subsidies --- Corporate subsidies --- Corporate welfare --- Government subsidies --- Grants --- Subventions --- Vouchers (Subsidies) --- Welfare, Corporate --- Government aid --- Foreign trade promotion --- Trade adjustment assistance --- Inflation --- Macroeconomics --- Money and Monetary Policy --- Price Level --- Deflation --- Monetary Policy --- Monetary economics --- Inflation targeting --- Sticky prices --- Price controls --- Price adjustments --- South Africa

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The paper asks how state of the art DSGE models that account for the conditional response of hours following a positive neutral technology shock compare in a marginal likelihood race. To that end we construct and estimate several competing small-scale DSGE models that extend the standard real business cycle model. In particular, we identify from the literature six different hypotheses that generate the empirically observed decline in worked hours after a positive technology shock. These models alternatively exhibit (i) sticky prices; (ii) firm entry and exit with time to build; (iii) habit in consumption and costly adjustment of investment; (iv) persistence in the permanent technology shocks; (v) labor market friction with procyclical hiring costs; and (vi) Leontief production function with labor-saving technology shocks. In terms of model posterior probabilities, impulse responses, and autocorrelations, the model favored is the one that exhibits habit formation in consumption and investment adjustment costs. A robustness test shows that the sticky price model becomes as competitive as the habit formation and costly adjustment of investment model when sticky wages are included.

Business & Economics --- Labor & Workers' Economics --- Labor supply --- Hours of labor --- Effect of technological innovations on --- Mathematical models. --- Econometric models. --- Alternative work schedules --- Children --- Labor, Hours of --- Work hours --- Work schedules --- Working-day --- Working hours --- Labor force --- Labor force participation --- Labor pool --- Work force --- Workforce --- Work --- Labor productivity --- Labor time --- Timekeeping --- Weekly rest-day --- Labor market --- Human capital --- Labor mobility --- Manpower --- Manpower policy --- Prices --- Business cycles --- Econometric models --- E-books --- Econometrics --- Labor --- Macroeconomics --- Innovation --- Research and Development --- Technological Change --- Intellectual Property Rights: General --- Labor Economics: General --- Wages, Compensation, and Labor Costs: General --- Time-Series Models --- Dynamic Quantile Regressions --- Dynamic Treatment Effect Models --- Diffusion Processes --- State Space Models --- Price Level --- Inflation --- Deflation --- Labour --- income economics --- Technology --- general issues --- Econometrics & economic statistics --- Real wages --- Structural vector autoregression --- Sticky prices --- Econometric analysis --- Labor economics --- Wages --- United States --- General issues --- Income economics