Monetary Policy and Core Inflation
42 Pages Posted: 17 Dec 2007
Date Written: December 2007
This paper studies optimal monetary policy responses in an economy featuring sectorial heterogeneity in the frequency of price adjustments. It shows that a central bank facing heterogeneous nominal rigidities is more likely to behave less aggressively than in a fully sticky economy. Hence, the supposedly excessive caution in the conduct of monetary policy shown by central banks could be partly explained by the existence of a relevant sectorial dispersion in the frequency of price adjustments.
Keywords: Core inflation, elasticity of intertemporal substitution, heterogeneity, nominal rigidity
JEL Classification: E43, E52, E58
Suggested Citation: Suggested Citation