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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Paper provided by National Bank of Belgium in its series Research series with number
200909-14.
Find related papers by JEL classification: E1 - Macroeconomics and Monetary Economics - - General Aggregative Models E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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