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On quality bias and inflation targets

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  • Schmitt-Grohé, Stephanie
  • Uribe, Martín

Abstract

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.

Suggested Citation

  • Schmitt-Grohé, Stephanie & Uribe, Martín, 2012. "On quality bias and inflation targets," Journal of Monetary Economics, Elsevier, vol. 59(4), pages 393-400.
  • Handle: RePEc:eee:moneco:v:59:y:2012:i:4:p:393-400
    DOI: 10.1016/j.jmoneco.2012.02.002
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    References listed on IDEAS

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    1. Adam, Klaus & Billi, Roberto M., 2006. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1877-1905, October.
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    Cited by:

    1. Anthony Diercks, 2016. "The Equity Premium, Long-Run Risk, and Optimal Monetary Policy," 2016 Meeting Papers 207, Society for Economic Dynamics.
    2. Ahrens, Steffen & Snower, Dennis J., 2014. "Envy, guilt, and the Phillips curve," Journal of Economic Behavior & Organization, Elsevier, vol. 99(C), pages 69-84.
    3. Schmitt-Grohé, Stephanie & Uribe, Martín, 2010. "The Optimal Rate of Inflation," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 13, pages 653-722 Elsevier.
    4. Masashige Hamano, 2013. "On business cycles of variety and quality," CREA Discussion Paper Series 13-21, Center for Research in Economic Analysis, University of Luxembourg.
    5. Ikeda, Daisuke, 2015. "Optimal inflation rates with the trending relative price of investment," Journal of Economic Dynamics and Control, Elsevier, vol. 56(C), pages 20-33.
    6. Diercks, Anthony M., 2015. "The Equity Premium, Long-Run Risk, & Optimal Monetary Policy," Finance and Economics Discussion Series 2015-87, Board of Governors of the Federal Reserve System (U.S.).
    7. Carlsson, Mikael & Westermark, Andreas, 2016. "Labor market frictions and optimal steady-state inflation," Journal of Monetary Economics, Elsevier, vol. 78(C), pages 67-79.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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