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CONDI: a cost-of-nominal-distortions index

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  • Stefano Eusepi
  • Bart Hobijn
  • Andrea Tambalotti

Abstract

We construct a price index with weights on the prices of different PCE goods chosen to minimize the welfare costs of nominal distortions: a cost-of-nominal-distortions index (CONDI). We compute these weights in a multisector New Keynesian model with time-dependent price setting, calibrated using U.S. data on the dispersion of price stickiness and labor shares across sectors. We find that the CONDI weights mostly depend on price stickiness and are less affected by the dispersion in labor shares. Moreover, CONDI stabilization leads to negligible welfare losses compared to the optimal policy and is better approximated by core rather than headline inflation targeting. An even better approximation of the CONDI can be obtained with an adjusted core index that covers total expenditures excluding autos, clothing, energy, and food at home, but that includes food away from home.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2009-03.

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Date of creation: 2009
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Handle: RePEc:fip:fedfwp:2009-03

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Keywords: Inflation (Finance) ; Price indexes ; Monetary policy;

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Citations

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Cited by:
  1. Stefano Siviero & Giovanni Veronese, 2011. "A policy-sensible benchmark core inflation measure," Oxford Economic Papers, Oxford University Press, vol. 63(4), pages 648-672, December.
  2. Dixon, Huw & Franklin, Jeremy & Millard, Stephen, 2014. "Sectoral shocks and monetary policy in the United Kingdom," Bank of England working papers 499, Bank of England.
  3. James Bullard, 2011. "Measuring inflation: the core is rotten," Speech, Federal Reserve Bank of St. Louis 180, Federal Reserve Bank of St. Louis.
  4. Marco Airaudo & Luis-Felipe Zanna, 2012. "Equilibrium Determinacy and Inflation Measures for Interest Rate Rules," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(4), pages 573-592, October.
  5. Henning Weber, 2012. "The Optimal Inflation Rate and Firm-Level Productivity Growth," Kiel Working Papers 1773, Kiel Institute for the World Economy.
  6. Sevim Kosem Alp, 2010. "Optimal Monetary Policy under Sectoral Heterogeneity in Inflation Persistence (Sektorel Enflasyon Ataleti Farkliligi Altinda Optimal Para Politikasi)," Working Papers 1004, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  7. Weber, Henning, 2013. "Learning By Doing in New Firms and the Optimal Rate of Inflation," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79761, Verein für Socialpolitik / German Economic Association.
  8. Ádám Reiff & Judit Várhegyi, 2013. "Sticky Price Inflation Index: An Alternative Core Inflation Measure," MNB Working Papers, Magyar Nemzeti Bank (the central bank of Hungary) 2013/2, Magyar Nemzeti Bank (the central bank of Hungary).
  9. Cheng-qi Hou & Pin Wang, 2014. "An Estimation of Sectoral Price Stickiness using Aggregate Data," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 53-70, June.
  10. Patnaik, Ila & Shah, Ajay & Veronese, Giovanni, 2011. "How to measure inflation in India?," Working Papers, National Institute of Public Finance and Policy 11/83, National Institute of Public Finance and Policy.
  11. Alan K. Detmeister, 2011. "The usefulness of core PCE inflation measures," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2011-56, Board of Governors of the Federal Reserve System (U.S.).
  12. Sevim Kosem-Alp, 2009. "The (Ir)relevance of Inflation Persistence for Inflation Targeting Policy Design," Departmental Working Papers, Bilkent University, Department of Economics 0903, Bilkent University, Department of Economics.

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