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Monetary policy and commodity price shocks

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  • Silke Tober
  • Tobias Zimmermann

Abstract

This paper analyses the effects of commodity price shocks in a new Keynesian model. The focus is on the central bank's choice of inflation target and the degree of real wage rigidity. It turns out that using core inflation rather than headline inflation is the superior strategy. Targeting expected headline inflation, as practiced by most central banks, is a viable practical alternative to the core inflation target. Simulations illustrate these points. The introduction of real wage rigidity into the model does not change these conclusions. Real wage rigidity does, however, imply second-round effects, making the monetary policy response, the inflation peak and the output drop more pronounced. Although in practice many of the assumptions of the model, such as full information, do not hold, lessons can be drawn for monetary policy. In case of a commodity supply shock, central banks would do well to focus on some measure of core inflation rather than headline inflation so as to reduce the volatility of both inflation and output. A communication strategy that places greater emphasis on underlying and expected inflation could serve to anchor inflation expectations.

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Bibliographic Info

Article provided by Springer in its journal Intereconomics.

Volume (Year): 44 (2009)
Issue (Month): 4 (July)
Pages: 231-237

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Handle: RePEc:spr:intere:v:44:y:2009:i:4:p:231-237

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  1. Guido Ascari & Christian Merkl, 2009. "Real Wage Rigidities and the Cost of Disinflations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 417-435, 03.
  2. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  3. Lenza, Michele, 2007. "Monetary policy and core inflation," Discussion Paper Series 1: Economic Studies 2007,35, Deutsche Bundesbank, Research Centre.
  4. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  5. Romain Duval & Lukas Vogel, 2008. "Oil Price Shocks, Rigidities and the Conduct of Monetary Policy: Some Lessons from a New Keynesian Perspective," OECD Economics Department Working Papers 603, OECD Publishing.
  6. Robert E. Hall, 2005. "Separating the business cycle from other economic fluctuations," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 133-179.
  7. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August.
  8. Patrick J. Kehoe & Andrew Atkeson, 1999. "Models of Energy Use: Putty-Putty versus Putty-Clay," American Economic Review, American Economic Association, vol. 89(4), pages 1028-1043, September.
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Cited by:
  1. Silke Tober, 2011. "Makroökonomische Politik zur Bewältigung der Krise im Euroraum: Die Rolle Deutschlands," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 37(1), pages 51-68.

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