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On quality bias and inflation targets

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  • Schmitt-Grohé, Stephanie
  • Uribe, Martín
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    Abstract

    Does Ramsey optimal policy call for adjusting the inflation target by the size of the quality bias in measured inflation? We find that if it is nonhedonic (or sticker) prices that are sticky, the conventional view, according to which it is optimal to adjust the inflation target upward by the size of the quality bias, is misguided. Furthermore, we establish that quality improvement is crucial for the determination of the optimal inflation target even in the absence of quality bias. In this case, if nonhedonic prices are sticky, sticker prices should fall at the rate of quality growth.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Monetary Economics.

    Volume (Year): 59 (2012)
    Issue (Month): 4 ()
    Pages: 393-400

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    Handle: RePEc:eee:moneco:v:59:y:2012:i:4:p:393-400

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    Web page: http://www.elsevier.com/locate/inca/505566

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    1. Adam, Klaus & Billi, Roberto M, 2003. "Optimal Monetary Policy Under Commitment with a Zero Bound on Nominal Interest Rates," CEPR Discussion Papers 4111, C.E.P.R. Discussion Papers.
    2. Stephanie Schmitt-Grohe & Martin Uribe, 2003. "Optimal Fiscal and Monetary Policy Under Imperfect Competition," NBER Working Papers 10149, National Bureau of Economic Research, Inc.
    3. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
    4. Robert J. Gordon, 2006. "The Boskin Commission Report: A Retrospective One Decade Later," International Productivity Monitor, Centre for the Study of Living Standards, vol. 12, pages 7-22, Spring.
    5. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
    6. Nicolini, Juan Pablo, 1998. "Tax evasion and the optimal inflation tax," Journal of Development Economics, Elsevier, vol. 55(1), pages 215-232, February.
    7. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    8. Alexander L. Wolman, 2011. "The Optimal Rate of Inflation with Trending Relative Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 355-384, 03.
    9. David Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
    10. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
    11. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
    12. David E. Lebow & Jeremy B. Rudd, 2003. "Measurement Error in the Consumer Price Index: Where Do We Stand?," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 159-201, March.
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    Cited by:
    1. Ahrens, Steffen & Snower, Dennis J., 2012. "Envy, Guilt, and the Phillips Curve," CEPR Discussion Papers 8796, C.E.P.R. Discussion Papers.

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