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Optimal monetary policy with distinct core and headline inflation rates

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Listed author(s):
  • Bodenstein, Martin
  • Erceg, Christopher J.
  • Guerrieri, Luca

Abstract

In a stylized DSGE model with an energy sector, the optimal policy response to an adverse energy supply shock implies a rise in core inflation, a larger rise in headline inflation, and a decline in wage inflation. The optimal policy is well approximated by policies that stabilize the output gap, but also by a wide array of "dual mandate" policies that are not overly aggressive in stabilizing core inflation. Finally, policies that react to a forecast of headline inflation following a temporary energy shock imply markedly different effects than policies that react to a forecast of core, with the former inducing greater volatility in core inflation and the output gap.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304-3932(08)00105-0
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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): Supplement 1 (October)
Pages: 18-33

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Handle: RePEc:eee:moneco:v:55:y:2008:i:s1:p:s18-s33
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

Keywords: Energy price shocks Monetary policy tradeoffs DSGE models;

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