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On Price Level Stability, Real Interest Rates and Core Inflation

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  • János Vincze

    (Magyar Nemzeti Bank (at the time of writing the study))

  • Sándor Valkovszky

    ()
    (Magyar Nemzeti Bank)

Abstract

The paper adresses several issues pertaining to the problem of monetary policy, inflation measurement, and relative prices. After some preliminary empirical analysis showing that the problem must be relevant we set out to conduct a mainly theoretical investigation. If the per period utility function is not homotheoretical counterpants, and their properties, including those that are calculated from them (such as real interest rates), must be interpreted with care. We examine the consequences of goods heterogeneity in the fremwork of a stochastic dynamic equlibrium model without a steady state. To solve the model we posit specific, though we think plausible, assumptions concerning fiscal policy in a small open economy. Conclusions are obtained with important policy implications to the effect that inflation variability may be tolareted, and that the correct meaning and interpretation of real interest rates may run counter to accepted ideas. Our general conclusion is tahat neglecting goods heterogeneity may grossly mislead policy makers and analysts in certain circumstances.

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File URL: http://english.mnb.hu/Root/Dokumentumtar/MNB/Kiadvanyok/mnbhu_mnbfuzetek/mnbhu_MF2001_3/wp2001_3.pdf
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Bibliographic Info

Paper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2001/3.

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Length: 41 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:mnb:wpaper:2001/3

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Web page: http://www.mnb.hu/
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  1. Sandor Valkovszky & Janos Vincze, 2001. "Estimates of and Problems with Core Inflation in Hungary," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 1(1), pages 69-99.
  2. Barnabás Ferenczi & Sándor Valkovszky & János Vincze, 2000. "What are Consumer Price Statistics Good for?," MNB Working Papers 2000/5, Magyar Nemzeti Bank (the central bank of Hungary).
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