Suppose my model has three sectors, two price flexible and only one sector has calvo type price rigidity.
Now when I write my Taylor rule, for the output gap should I include:
- log-deviation of total output ?
or
- log-deviation of third sector output only ?
There is no general answer to this. Do you want to build a normative or a positive/descriptive model? In terms of welfare, the sticky price sector may be the one to target, but actual central banks focus more on total output
Thank you Professor, You are a saviour everytime.