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The Consumer Price Index as a Measure of Inflation and Target of Monetary Policy

Author

Listed:
  • Dimitri B. Papadimitriou

    (The Jerome Levy Economics Institute)

  • L. Randall Wray

    (The Jerome Levy Economics Institute)

Abstract

Recent low and stable inflation rates are, according to most observers, the result of the Federal Reserve's monetary policy, and most observers do not seem to question that the Fed's sole responsibility is to fight inflation. However, as Executive Director Dimitri B. Papadimitriou and Research Associate L. Randall Wray, have shown, the Fed has not been successful in selecting a monetary policy target that is closely correlated with inflation. In response to this flaw, some theorists and policymakers have advocated the use of an aggregate price index as both the target and the goal of monetary policy. In this paper, and Wray evaluate the most frequently suggested of these indexes-the consumer price index (CPI)-for its appropriateness as a monetary policy target. They determine first which of the CPI's components have tended to raise it and then how a change in monetary policy would affect these components. They conclude that there are serious empirical questions about the transmission mechanisms through which monetary policy is supposed to affect the CPI. Therefore, even if it represented a perfect measure of the cost of living, they would still disagree with its use as a measure for monetary policy.

Suggested Citation

  • Dimitri B. Papadimitriou & L. Randall Wray, 1998. "The Consumer Price Index as a Measure of Inflation and Target of Monetary Policy," Macroeconomics 9807004, EconWPA.
  • Handle: RePEc:wpa:wuwpma:9807004
    Note: Type of Document - Acrobat PDF; prepared on IBM PC - PC; to print on PostScript; pages: 52; figures: included
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    JEL classification:

    • E - Macroeconomics and Monetary Economics

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