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Price subsidies and the conduct of monetary policy

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  • Ben Aïssa, Mohamed Safouane
  • Rebei, Nooman

Abstract

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 34 (2012)
Issue (Month): 3 ()
Pages: 769-787

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Handle: RePEc:eee:jmacro:v:34:y:2012:i:3:p:769-787

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Web page: http://www.elsevier.com/locate/inca/622617

Related research

Keywords: Taylor rules; Optimal monetary policy; Sticky prices; General equilibrium; Government subsidies; Bayesian estimation;

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References

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  1. Rotemberg, Julio J, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 517-31, October.
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  4. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
  5. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 755-775, January.
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  8. Bodenstein, Martin & Erceg, Christopher J. & Guerrieri, Luca, 2008. "Optimal monetary policy with distinct core and headline inflation rates," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages S18-S33, October.
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  12. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
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  14. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  15. Basu, S., 1993. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," Papers 93-23, Michigan - Center for Research on Economic & Social Theory.
  16. Kevin X. D. Huang & Zheng Liu, 2004. "Inflation targeting: what inflation rate to target?," Working Papers 04-6, Federal Reserve Bank of Philadelphia.
  17. Lawrence J. Christiano & Michele Boldrin & Jonas D. M. Fisher, 2001. "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review, American Economic Association, vol. 91(1), pages 149-166, March.
  18. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August.
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Cited by:
  1. Michael Plante, 2013. "The long–run macroeconomic impacts of fuel subsidies," Working Papers 1303, Federal Reserve Bank of Dallas.
  2. Michael Plante Author-X-Name-First: Michael Author-X-Name-Last: Plante, 2013. "TheLong-RunMacroeconomicImpactsofFuelSubsidies," Caepr Working Papers 2013-002, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.

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