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Inflation Persistence and Optimal Monetary Policy in the Euro Area

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Author Info
Benigno, Pierpaolo
Lopez-Salido, J. David

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Abstract

In this paper we present an optimizing-agent model for the euro area to emphasize how the existence of heterogeneity in inflation persistence across regions matters for the design of monetary policy. We find supporting evidence of the existence of such a heterogeneity in inflation dynamics across euro area countries. In particular, based on the estimation of New Keynesian Phillips Curves for five major countries of the euro area, we find that inflation in Germany has a dominant forward-looking component, while in the other group of countries inflation show a significant inertial (backward looking) behavior. Under this circumstance, we study the welfare implications of four monetary policy rules following terms-of-trade shocks: fully optimal, optimal inflation targeting, HICP targeting, and output gap stabilization.

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File URL: http://dx.doi.org/10.1353/mcb.2006.0038
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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 38 (2006)
Issue (Month): 3 (April)
Pages: 587-614
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Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:3:p:587-614

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  4. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen. [Downloadable!] (restricted)
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  5. Benigno, Pierpaolo, 2001. "Optimal Monetary Policy in a Currency Area," CEPR Discussion Papers 2755, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. Jordi Galí & Mark Gertler & J. David López-Salido, 2000. "European Inflation Dynamics," Banco de España Working Papers 0020, Banco de España.
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  16. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October. [Downloadable!] (restricted)
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  17. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October. [Downloadable!] (restricted)
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  18. Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204 Elsevier. [Downloadable!] (restricted)
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  20. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  21. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September. [Downloadable!] (restricted)
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