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On quality bias and inflation targets

  • Schmitt-Grohé, Stephanie
  • Uribe, Martín
Registered author(s):

    Does Ramsey optimal policy call for adjusting the inflation target by the size of the quality bias in measured inflation? We find that if it is nonhedonic (or sticker) prices that are sticky, the conventional view, according to which it is optimal to adjust the inflation target upward by the size of the quality bias, is misguided. Furthermore, we establish that quality improvement is crucial for the determination of the optimal inflation target even in the absence of quality bias. In this case, if nonhedonic prices are sticky, sticker prices should fall at the rate of quality growth.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304393212000220
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    Article provided by Elsevier in its journal Journal of Monetary Economics.

    Volume (Year): 59 (2012)
    Issue (Month): 4 ()
    Pages: 393-400

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    Handle: RePEc:eee:moneco:v:59:y:2012:i:4:p:393-400
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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    1. David Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
    2. Adam, Klaus & Billi, Roberto M, 2003. "Optimal Monetary Policy Under Commitment with a Zero Bound on Nominal Interest Rates," CEPR Discussion Papers 4111, C.E.P.R. Discussion Papers.
    3. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
    4. Nicolini, Juan Pablo, 1998. "Tax evasion and the optimal inflation tax," Journal of Development Economics, Elsevier, vol. 55(1), pages 215-232, February.
    5. Schmitt-Grohé, Stephanie & Uribe, Martín, 2001. "Optimal Fiscal and Monetary Policy under Imperfect Competition," CEPR Discussion Papers 2688, C.E.P.R. Discussion Papers.
    6. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," NBER Working Papers 5893, National Bureau of Economic Research, Inc.
    7. David E. Lebow & Jeremy B. Rudd, 2003. "Measurement Error in the Consumer Price Index: Where Do We Stand?," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 159-201, March.
    8. Alexander L. Wolman, 2009. "The optimal rate of inflation with trending relative prices," Working Paper 09-02, Federal Reserve Bank of Richmond.
    9. Robert J. Gordon, 2006. "The Boskin Commission Report: A Retrospective One Decade Later," NBER Working Papers 12311, National Bureau of Economic Research, Inc.
    10. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
    11. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
    12. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    13. Summers, Lawrence, 1991. "How Should Long-Term Monetary Policy Be Determined? Panel Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 625-31, August.
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