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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. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
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  8. Kevin X. D. Huang & Zheng Liu, 2003. "Inflation Targeting: What Inflation Rate to Target?," Emory Economics 0318, Department of Economics, Emory University (Atlanta).
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  13. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," Departmental Working Papers 200106, Rutgers University, Department of Economics.
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  17. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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  20. Tack Yun, 2005. "Optimal Monetary Policy with Relative Price Distortions," American Economic Review, American Economic Association, vol. 95(1), pages 89-109, March.
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Citations

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Cited by:
  1. Michael Plante, 2013. "The long–run macroeconomic impacts of fuel subsidies," Working Papers 1303, Federal Reserve Bank of Dallas.
  2. 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.

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