What Measure of Inflation Should a Central Bank Target?
This paper assumes that a central bank commits itself to maintaining an inflation target and then asks what measure of the inflation rate the central bank should use if it wants to maximize economic stability. The paper first formalizes this problem and examines its microeconomic foundations. It then shows how the weight of a sector in the stability price index depends on the sector's characteristics, including size, cyclical sensitivity, sluggishness of price adjustment, and magnitude of sectoral shocks. When a numerical illustration of the problem is calibrated to U.S. data, one tentative conclusion is that a central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages.
|Date of creation:||2003|
|Date of revision:|
|Publication status:||Published in Journal of the European Economic Association|
|Contact details of provider:|| Postal: |
Web page: http://www.economics.harvard.edu/
More information through EDIRC
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.:
- Steinsson, Jon, 2003.
"Optimal monetary policy in an economy with inflation persistence,"
Journal of Monetary Economics,
Elsevier, vol. 50(7), pages 1425-1456, October.
- Jón Steinsson, 2000. "Optimal monetary policy in an economy with inflation persistence," Economics wp11, Department of Economics, Central bank of Iceland.
- N. Gregory Mankiw & Ricardo Reis, 2001.
"Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve,"
NBER Working Papers
8290, National Bureau of Economic Research, Inc.
- N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
- N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November.
- Mankiw, N. Gregory & Reis, Ricardo, 2002. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Scholarly Articles 3415324, Harvard University Department of Economics.
- N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers 1922, Harvard - Institute of Economic Research.
- Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
- Ball, Laurence & Romer, David, 1990.
"Real Rigidities and the Non-neutrality of Money,"
Review of Economic Studies,
Wiley Blackwell, vol. 57(2), pages 183-203, April.
- Benigno, Pierpaolo, 2001.
"Optimal Monetary Policy in a Currency Area,"
CEPR Discussion Papers
2755, C.E.P.R. Discussion Papers.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
- Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
- Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August.
- Wynne, Mark A., 1999.
"Core inflation: a review of some conceptual issues,"
Working Paper Series
0005, European Central Bank.
- Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, issue May, pages 205-228.
- Mark A. Wynne, 1999. "Core inflation: a review of some conceptual issues," Working Papers 9903, Federal Reserve Bank of Dallas.
- Edmund Phelps, 1978. "Disinflation without recession: Adaptive guideposts and monetary policy," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 114(4), pages 783-809, December.
When requesting a correction, please mention this item's handle: RePEc:hrv:faseco:3415322. 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: (Ben Steinberg)
If references are entirely missing, you can add them using this form.