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Inflation Persistence, Price Indexation and Optimal Simple Interest Rate Rules

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  • Guido Ascari
  • Nicola Branzoli

Abstract

type="main"> We study the properties of the optimal interest rate rule under different sources of inflation persistence. In our model, the optimal policy minimizes price dispersion, which depends on the degree of price indexation. When indexation is zero, inflation persistence depends only on the level of trend inflation, the inflation gap is purely forward-looking and the optimal policy targets inflation stability. Full indexation makes the inflation gap persistent, eliminates the effects of trend inflation and makes the optimal policy target the real interest rate. We compare our results with empirical estimates of the FED's policy in the post-WWII era.

Suggested Citation

  • Guido Ascari & Nicola Branzoli, 2015. "Inflation Persistence, Price Indexation and Optimal Simple Interest Rate Rules," Manchester School, University of Manchester, vol. 83, pages 1-30, September.
  • Handle: RePEc:bla:manchs:v:83:y:2015:i::p:1-30
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    File URL: http://hdl.handle.net/10.1111/manc.12117
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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