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


  • Dimitri B. Papadimitriou

    (The Jerome Levy Economics Institute)

  • L. Randall Wray

    (The Jerome Levy Economics Institute)


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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    References listed on IDEAS

    1. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    2. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    3. José Darío Uribe, 1995. "Flujos de Capital en Colombia: 1978-1994," BORRADORES DE ECONOMIA 002733, BANCO DE LA REPÚBLICA.
    4. Razin, Assaf & Sadka, Efraim, 1991. "Efficient investment incentives in the presence of capital flight," Journal of International Economics, Elsevier, vol. 31(1-2), pages 171-181, August.
    5. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," MPRA Paper 13843, University Library of Munich, Germany.
    6. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-153, February.
    7. Kouri, Pentti J K & Porter, Michael G, 1974. "International Capital Flows and Portfolio Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 443-467, May/June.
    8. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
    9. Ffrench-Davis, Ricardo, 1990. "Debt-Equity Swaps in Chile," Cambridge Journal of Economics, Oxford University Press, vol. 14(1), pages 109-126, March.
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    JEL classification:

    • E - Macroeconomics and Monetary Economics

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