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On price level stability, real interest rates and core inflation

In: Modelling aspects of the inflation process and the monetary transmission mechanism in emerging market countries


  • Sandor Valkovszky

    (National Bank of Hungary)

  • Janos Vincze

    (National Bank of Hungary)


The paper adresses several issues pertaining to the problem of monetary policy, inflation measurement, and relative prices. After some preliminary empirical analysis showing that the problem must be relevant we set out to conduct a mainly theoretical investigation. If the per period utility function is not homotheoretical counterpants, and their properties, including those that are calculated from them (such as real interest rates), must be interpreted with care. We examine the consequences of goods heterogeneity in the fremwork of a stochastic dynamic equlibrium model without a steady state. To solve the model we posit specific, though we think plausible, assumptions concerning fiscal policy in a small open economy. Conclusions are obtained with important policy implications to the effect that inflation variability may be tolareted, and that the correct meaning and interpretation of real interest rates may run counter to accepted ideas. Our general conclusion is tahat neglecting goods heterogeneity may grossly mislead policy makers and analysts in certain circumstances.
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Suggested Citation

  • Sandor Valkovszky & Janos Vincze, 2001. "On price level stability, real interest rates and core inflation," BIS Papers chapters,in: Bank for International Settlements (ed.), Modelling aspects of the inflation process and the monetary transmission mechanism in emerging market countries, volume 8, pages 151-174 Bank for International Settlements.
  • Handle: RePEc:bis:bisbpc:08-07

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    1. Sandor Valkovszky & Janos Vincze, 2001. "Estimates of and Problems with Core Inflation in Hungary," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 1(1), pages 69-99.
    2. Stephen G. Cecchetti & Erica L. Groshen, 2000. "Understanding Inflation: Implications for Monetary Policy," NBER Working Papers 7482, National Bureau of Economic Research, Inc.
    3. Barnabás Ferenczi & Sándor Valkovszky & János Vincze, 2000. "What are Consumer Price Statistics Good for?," MNB Working Papers 2000/5, Magyar Nemzeti Bank (Central Bank of Hungary).
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