Optimal monetary policy with distinct core and headline inflation rates
AbstractIn a stylized DSGE model with an energy sector, the optimal policy response to an adverse energy supply shock implies a rise in core inflation, a larger rise in headline inflation, and a decline in wage inflation. The optimal policy is well-approximated by policies that stabilize the output gap, but also by a wide array of "dual mandate" policies that are not overly aggressive in stabilizing core inflation. Finally, policies that react to a forecast of headline inflation following a temporary energy shock imply markedly different effects than policies that react to a forecast of core, with the former inducing greater volatility in core inflation and the output gap.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 941.
Date of creation: 2008
Date of revision:
Other versions of this item:
- 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.
- NEP-ALL-2008-09-05 (All new papers)
- NEP-CBA-2008-09-05 (Central Banking)
- NEP-DGE-2008-09-05 (Dynamic General Equilibrium)
- NEP-MAC-2008-09-05 (Macroeconomics)
- NEP-MON-2008-09-05 (Monetary Economics)
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