IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

CONDI: a cost-of-nominal-distortions index

  • Stefano Eusepi
  • Bart Hobijn
  • Andrea Tambalotti

We construct a price index with weights for the prices of different PCE (personal consumption expenditures) goods chosen to minimize the welfare costs of nominal distortions. In this cost-of-nominal-distortions index (CONDI), the weights are computed in a multi-sector New Keynesian model with time-dependent price setting. The model is calibrated using U.S. data on the dispersion of price stickiness and labor shares across sectors. We find that the CONDI weights depend mostly on price stickiness and are less affected by the dispersion in labor shares. Moreover, CONDI stabilization closely approximates the optimal monetary policy and leads to negligible welfare losses. Finally, CONDI is better approximated by targeting core inflation rather than headline inflation--and is even better approximated with an adjusted core index that covers total expenditures excluding autos, clothing, energy, and food at home, but including food away from home.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.newyorkfed.org/research/staff_reports/sr367.html
Download Restriction: no

File URL: http://www.newyorkfed.org/research/staff_reports/sr367.pdf
Download Restriction: no

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 367.

as
in new window

Length:
Date of creation: 2009
Date of revision:
Handle: RePEc:fip:fednsr:367
Contact details of provider: Postal: 33 Liberty Street, New York, NY 10045-0001
Web page: http://www.newyorkfed.org/
Email:


More information through EDIRC

Order Information: Web: http://www.ny.frb.org/rmaghome/staff_rp/ Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
  2. Olivier Blanchard & Jordi Galí, 2005. "Real wage rigidities and the New Keynesian model," Working Papers 05-14, Federal Reserve Bank of Boston.
  3. Carlos Carvalho, 2005. "Heterogeneity in Price Setting and the Real Effects of Monetary Shocks," Macroeconomics 0509017, EconWPA, revised 12 Sep 2005.
  4. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  5. Kevin D. Sheedy, 2007. "Inflation Persistence When Price Stickiness Differs Between Industries," CEP Discussion Papers dp0838, Centre for Economic Performance, LSE.
  6. Akos Valentinyi & Berthold Herrendorf, 2008. "Measuring Factor Income Shares at the Sectoral Level," IEHAS Discussion Papers 0803, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  7. Ariel Burstein & Christian Hellwig, 2007. "Prices and Market Shares in a Menu Cost Model," NBER Working Papers 13455, National Bureau of Economic Research, Inc.
  8. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
  9. Roberto M. Billi, 2007. "Optimal inflation for the U.S," Research Working Paper RWP 07-03, Federal Reserve Bank of Kansas City.
  10. Clinton P. McCully & Brian C. Moyer & Kenneth J. Stewart, 2007. "A Reconciliation between the Consumer Price Index and the Personal Consumption Expenditures Price Index," BEA Papers 0079, Bureau of Economic Analysis.
  11. Kevin X. D. Huang & Zheng Liu, 2003. "Inflation Targeting: What Inflation Rate to Target?," Emory Economics 0318, Department of Economics, Emory University (Atlanta).
  12. Todd E. Clark, 1999. "A comparison of the CPI and the PCE price index," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 15-29.
  13. Danny Quah & Danny Quah & Shaun P. Vahey, 1995. "Measuring Core Inflation," CEP Discussion Papers dp0254, Centre for Economic Performance, LSE.
  14. Peter J. Klenow & Oleksiy Kryvtsov, 2007. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Discussion Papers 07-007, Stanford Institute for Economic Policy Research.
  15. Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc.
  16. Robert Lucas & Mike Golosov, 2004. "Menu Costs and Phillips Curves," 2004 Meeting Papers 144, Society for Economic Dynamics.
  17. Todd E. Clark, 2001. "Comparing measures of core inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-31.
  18. Henrik Jensen, 2002. "Targeting Nominal Income Growth or Inflation?," American Economic Review, American Economic Association, vol. 92(4), pages 928-956, September.
  19. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2003. "Optimal Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 825-860.
  20. Jean Imbs & Eric Jondeau & Florian Pelgrin, 2007. "Aggregating Phillips Curves," Swiss Finance Institute Research Paper Series 07-06, Swiss Finance Institute.
  21. Emi Nakamura & Jón Steinsson, 2010. "Monetary Non-Neutrality in a Multisector Menu Cost Model," The Quarterly Journal of Economics, MIT Press, vol. 125(3), pages 961-1013, August.
  22. Gregory W. Huffman & Mark A. Wynne, 1995. "The role of intratemporal adjustment costs in a multi-sector economy," Working Papers 9508, Federal Reserve Bank of Dallas.
  23. Stanley Fischer & Franco Modigliani, 1978. "Towards An Understanding of the Real Effects and Costs of Inflation," NBER Working Papers 0303, National Bureau of Economic Research, Inc.
  24. Mankiw, N. Gregory & Reis, Ricardo, 2003. "What Measure of Inflation Should a Central Bank Target?," Scholarly Articles 3415322, Harvard University Department of Economics.
  25. Pierpaolo Benigno & Michael Woodford, 2004. "Inflation Stabilization and Welfare: The Case of a Distorted Steady State," NBER Working Papers 10838, National Bureau of Economic Research, Inc.
  26. Niels Arne Dam & Carlos Carvalho, 2009. "Estimating the Cross-sectional Distribution of Price Stickiness from Aggregate Data," 2009 Meeting Papers 702, Society for Economic Dynamics.
  27. Martin Bodenstein & Christopher J. Erceg & Luca Guerrieri, 2008. "Optimal monetary policy with distinct core and headline inflation rates," International Finance Discussion Papers 941, Board of Governors of the Federal Reserve System (U.S.).
  28. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc.
  29. Ariel Burstein & Christian Hellwig, 2008. "Welfare Costs of Inflation in a Menu Cost Model," American Economic Review, American Economic Association, vol. 98(2), pages 438-43, May.
  30. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August.
  31. BOUAKEZ, Hafedh & CARDIA, Emanuela & RUGE-MURCIA, Francisco J., 2009. "Sectoral Price Rigidity and Aggregate Dynamics," Cahiers de recherche 01-2009, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  32. Patrick J. Kehoe & Virgiliu Midrigan, 2008. "Temporary Price Changes and the Real Effects of Monetary Policy," NBER Working Papers 14392, National Bureau of Economic Research, Inc.
  33. Roberto M. Billi & George A. Kahn, 2008. "What is the optimal inflation rate?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-28.
  34. Michael T. Kiley, 2008. "Estimating the common trend rate of inflation for consumer prices and consumer prices excluding food and energy prices," Finance and Economics Discussion Series 2008-38, Board of Governors of the Federal Reserve System (U.S.).
  35. Carvalho Carlos, 2006. "Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(3), pages 1-58, December.
  36. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, vol. 63(2), pages 293-320, July.
  37. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  38. David Genesove, 1999. "The Nominal Rigidity of Apartment Rents," NBER Working Papers 7137, National Bureau of Economic Research, Inc.
  39. Quah, Danny, 1995. "Measuring Core Inflation," CEPR Discussion Papers 1153, C.E.P.R. Discussion Papers.
  40. Mark Gertler & John Leahy, 2006. "A Phillips curve with an Ss foundation," Working Papers 06-8, Federal Reserve Bank of Philadelphia.
  41. Cogley, Timothy, 2002. "A Simple Adaptive Measure of Core Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 94-113, February.
  42. Robert Rich & Charles Steindel, 2007. "A comparison of measures of core inflation," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 19-38.
  43. Virgiliu Midrigan, 2005. "Menu Costs, Multi-Product Firms and Aggregate Fluctuations," Macroeconomics 0511004, EconWPA.
  44. BOUAKEZ, Hafed & CARDIA Emanuela & RUGE-MURCIA, Francisco, 2005. "The Transmission of Monetary Policy in a Multi-Sector Economy," Cahiers de recherche 2005-16, Universite de Montreal, Departement de sciences economiques.
  45. Herrendorf, Berthold & Valentinyi, Akos, 2007. "Measuring Factor Income Shares at the Sector Level - A Primer," CEPR Discussion Papers 6271, C.E.P.R. Discussion Papers.
  46. Emmanuel Dhyne & Luis J. Alvarez & Herve Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lunnemann & Fabio Rumler & Jouko Vilmunen, 2006. "Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data," Journal of Economic Perspectives, American Economic Association, vol. 20(2), pages 171-192, Spring.
Full references (including those not matched with items on IDEAS)

This item is featured on the following reading lists or Wikipedia pages:

  1. CONDI: A Cost-of-Nominal-Distortions Index (AEJ:MA 2011) in ReplicationWiki

When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:367. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Farber)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.