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Price Subsidies and the Conduct of Monetary Policy

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  • Nooman Rebei
  • Mohamed Safouane Ben Aissa

Abstract

This paper investigates optimized monetary policy rules in the presence of government intervention to stabilize prices of certain categories of goods and services. The paper estimates a small-scale, structural equilibrium model with a sticky-price sector and a subsidized price sector for a large number of countries using Bayesian methods. The main result of this paper is that strict headline inflation targeting could be outperformed by sectoral inflation targeting, output gap stabilization, or a combination of these. In addition, several country cases exhibit lower performance of both headline and core inflation stabilization, the two most common policies in modern central banks'' practices. For practical monetary policy design, we numerically identify country specific thresholds for the degree of government intervention in price setting under which core inflation targeting turns out to be the optimal choice in the context of implementable Taylor rules.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/15.

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Length: 43
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/15

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Keywords: Economic models; Inflation targeting; inflation; monetary policy; inflation rates; monetary economics; monetary authority; optimal monetary policy; average inflation; central bank; inflation stabilization; price inflation; relative prices; monetary policy rule; monetary policy rules; nominal interest rate; monetary fund; relative price; price level; annual inflation; price elasticity; monetary authorities; inflation dynamics; measure of inflation; inflation rate; rate of inflation; inflation observations; wage inflation; discount rate; inflation-targeting; monetary transmission; money growth; macroeconomic stability; monetary target; monetary policy reaction functions; monetary transmission mechanism; average inflation rate; monetary shock; changes in prices; inflation targeting regime;

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References

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  1. Rania Al Mashat & Andreas Billmeier, 2008. "The Monetary Transmission Mechanism in Egypt," Working Papers 411, Economic Research Forum, revised Jun 2008.
  2. Rotemberg, Julio J, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 517-31, October.
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  8. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
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  17. Tack Yun, 2005. "Optimal Monetary Policy with Relative Price Distortions," American Economic Review, American Economic Association, vol. 95(1), pages 89-109, March.
  18. Huang, Kevin X.D. & Liu, Zheng, 2005. "Inflation targeting: What inflation rate to target?," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1435-1462, November.
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  22. Martin Bodenstein & Christopher J. Erceg & Luca Guerrieri, 2008. "Optimal monetary policy with distinct core and headline inflation rates," International Finance Discussion Papers 941, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Michael Plante Author-X-Name-First: Michael Author-X-Name-Last: Plante, 2013. "TheLong-RunMacroeconomicImpactsofFuelSubsidies," Caepr Working Papers 2013-002, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  2. Plante, Michael, 2014. "The long-run macroeconomic impacts of fuel subsidies," Journal of Development Economics, Elsevier, vol. 107(C), pages 129-143.

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