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Inflation to target : what inflation to target?

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  • Kevin X. D. Huang
  • Zheng Liu

Abstract

This paper derives a central bank's objective function and optimal policy rule for an economy with both CPI and PPI inflation rates. It implements constrained-optimal policy rules with minimal information requirement, and evaluates the robustness of these simple rules when the central bank may not know the exact sources of shocks or nominal rigidities. One of the main findings is that monetary policy that ignores PPI inflation rate or PPI sector shocks can result in significant welfare loss.

Suggested Citation

  • Kevin X. D. Huang & Zheng Liu, 2003. "Inflation to target : what inflation to target?," Research Working Paper RWP 03-10, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:rwp03-10
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    File URL: https://www.kansascityfed.org/documents/5387/pdf-RWP03-10.pdf
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    References listed on IDEAS

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    Cited by:

    1. Wang, Jian, 2010. "Home bias, exchange rate disconnect, and optimal exchange rate policy," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 55-78, February.
    2. Ko, Jun-Hyung, 2011. "Optimal monetary policy with durable services: user cost versus purchase price," MPRA Paper 34147, University Library of Munich, Germany.

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    Monetary; policy;

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