On Quality Bias and Inflation Targets
A policy issue central banks are confronted with is whether inflation targets should be adjusted to account for the systematic upward bias in measured inflation due to quality improvements in consumption goods. We show that in the context of a Ramsey equilibrium the answer to this question depends on what prices are assumed to be sticky. If nonquality-adjusted prices are assumed to be sticky, then the Ramsey plan predicts that the inflation target should not be corrected. If, on the other hand, quality-adjusted (or hedonic) prices are assumed to be sticky, then the Ramsey plan calls for raising the inflation target by the magnitude of the bias.
|Date of creation:||Nov 2009|
|Date of revision:|
|Publication status:||published as On Quality Bias and Inflation Targets (with Martín Uribe), Journal of Monetary Economics, 59, May 2012, 393-400.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
- Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
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