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Inflation persistence, backward-looking firms, and monetary policy in an input-output economy

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Abstract

This paper studies the implications of inflation persistence (generated by backward-looking price setters) for monetary policy in a New Keynesian \"input-output\" model--a model with sticky prices in both intermediate and final goods sectors. Optimal policy under commitment depends on the degree of inflation persistence in both sectors. Under discretion, speed-limit targeting--targeting the change in the output gap--outperforms price-level and inflation targeting in the presence of inflation persistence. If inflation persistence is low in the intermediate goods sector, price-level targeting outperforms inflation targeting despite high inflation persistence in the final goods sector.

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  • Brad E. Strum, 2010. "Inflation persistence, backward-looking firms, and monetary policy in an input-output economy," Finance and Economics Discussion Series 2010-55, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2010-55
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    Cited by:

    1. Ida, Daisuke, 2020. "Sectoral inflation persistence and optimal monetary policy," Journal of Macroeconomics, Elsevier, vol. 65(C).

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    Keywords

    Inflation (Finance); Monetary policy;

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