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Targeting Inflation, The Effects of Monetary Policy on the CPI and Its Housing Component

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Author Info
Dimitri B. Papadimitriou ()
L. Randall Wray ()

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Abstract

The targets for monetary policy adopted by the Fed in recent years have not proven to be closely correlated with inflation, leading some theorists and policymakers to advocate the use of a price index, such as the consumer price index (CPI), as both the target and the goal of monetary policy. Executive Director Dimitri B. Papadimitriou and Research Associate L. Randall Wray show that such a choice is not wise because the CPI does not accurately reflect market-caused price increases and is not under the control of monetary policy. Their analysis extends beyond that of recent reports to show how and why the transmission mechanisms through which monetary policy is thought to affect the CPI are tenuous at best. The authors focus on the housing component of the CPI to illustrate their point. They conclude that those components of the CPI that to affect have been declining in importance, meaning that to produce a given reduction in the overall rate of inflation will require that monetary policy have an increasingly larger impact on an ever-diminishing portion of the consumer basket. Therefore, careful reconsideration of an alternative ultimate target, such as the rate of economic growth or the unemployment rate, is warranted.

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Paper provided by Levy Economics Institute, The in its series Economics Public Policy Brief Archive with number 27.

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Handle: RePEc:lev:levppb:27

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Jerry L. Jordan, 1993. "Credibility begins with a clear commitment to price stability," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct 1. [Downloadable!]
  3. Wynne, Mark A & Sigalla, Fiona D, 1996. " A Survey of Measurement Biases in Price Indexes," Journal of Economic Surveys, Blackwell Publishing, vol. 10(1), pages 55-89, March.
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  4. Daniel L. Thornton, 1988. "The borrowed-reserves operating procedures: theory and evidence," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 30-54. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Oren M. Levin-Waldman, . "Automatic Adjustment of the Minimum Wage, Linking the Minimum Wage to Productivity," Economics Public Policy Brief Archive 42, Levy Economics Institute, The. [Downloadable!]
  2. Oren M. Levin-Waldman, 1998. "Linking the Minimum Wage to Productivity," Macroeconomics 9802015, EconWPA. [Downloadable!]
  3. L. Randall Wray, 2007. "A Post-Keynesian View of Central Bank Independence, Policy Targets, and the Rules-versus-Discretion Debate," Economics Working Paper Archive wp_510, Levy Economics Institute, The. [Downloadable!]
    Other versions:
  4. L. Randall Wray, . "Why Does The Fed Want Slower Growth?," Economics Policy Note Archive 00-7, Levy Economics Institute, The. [Downloadable!]
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