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Micro data on nominal rigidity, inflation persistence and optimal monetary policy

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  • Engin Kara

    ()
    (National Bank of Belgium, Research Department)

Abstract

The popular Calvo model with indexation (Christiano, Eichenbaum and Evans, 2005) and sticky information (Mankiw and Reis, 2002) model have guided much of the monetary policy discussion. The strength of these approaches is that they can explain the persistence of inflation. However, both of these theories are inconsistent with the micro data on prices. In this paper, I evaluate the consequences of implementing policies that are optimal from the perspective of models that overlook the micro-data. To do so, I employ a Generalized Taylor Economy (GTE) (Dixon and Kara, 2007). While there is no material difference between the GTE and its popular alternatives in terms of inflation persistence, a difference arises when it comes to the micro-data: the GTE is consistent with the micro-data. The findings reported in the paper suggest that policy conclusions are significantly affected by whether persistence arises in a manner consistent with the micro-data and that policies that are optimal from the perspective of the models that are inconsistent with the microdata can lead to large welfare losses in the GTE

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File URL: http://www.nbb.be/doc/oc/repec/reswpp/wp175En.pdf
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Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Research with number 175.

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Length: 44 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:nbb:reswpp:200909-14

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Related research

Keywords: Inflation persistence; DSGE models; Optimal Monetary Policy;

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Cited by:
  1. Millard, Stephen & O'Grady, Tom, 2012. "What do sticky and flexible prices tell us?," Bank of England working papers 457, Bank of England.

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