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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 for the prices of different PCE (personal consumption expenditures) goods chosen to minimize the welfare costs of nominal distortions. In this cost-of-nominal-distortions index (CONDI), the weights are computed in a multi-sector New Keynesian model with time-dependent price setting. The model is calibrated using U.S. data on the dispersion of price stickiness and labor shares across sectors. We find that the CONDI weights depend mostly on price stickiness and are less affected by the dispersion in labor shares. Moreover, CONDI stabilization closely approximates the optimal monetary policy and leads to negligible welfare losses. Finally, CONDI is better approximated by targeting core inflation rather than headline inflation--and is even better approximated with an adjusted core index that covers total expenditures excluding autos, clothing, energy, and food at home, but including food away from home.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 367.

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Date of creation: 2009
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Handle: RePEc:fip:fednsr:367

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Keywords: Personal Consumption Expenditures Price Index ; Prices;

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Citations

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Cited by:
  1. Alan K. Detmeister, 2011. "The usefulness of core PCE inflation measures," Finance and Economics Discussion Series 2011-56, Board of Governors of the Federal Reserve System (U.S.).
  2. Patnaik, Ila & Shah, Ajay & Veronese, Giovanni, 2011. "How to measure inflation in India?," Working Papers 11/83, National Institute of Public Finance and Policy.
  3. Henning Weber, 2012. "The Optimal Inflation Rate and Firm-Level Productivity Growth," Kiel Working Papers 1773, Kiel Institute for the World Economy.
  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. 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.
  6. James Bullard, 2011. "Measuring inflation: the core is rotten," Speech, Federal Reserve Bank of St. Louis, issue May 18.
  7. 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.
  8. Sevim Kosem-Alp, 2009. "The (Ir)relevance of Inflation Persistence for Inflation Targeting Policy Design," Departmental Working Papers 0903, Bilkent University, Department of Economics.

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