Optimal Inflation Weights in the Euro Area

37 Pages Posted: 2 Apr 2016

See all articles by Daniela Bragoli

Daniela Bragoli

Università Cattolica del Sacro Cuore

Massimiliano Rigon

Bank of Italy

Francesco Zanetti

University of Oxford

Date Written: January 21, 2016

Abstract

This study investigates the appropriate measure of inflation in the euro area that the central bank should adopt in order to minimize social welfare losses stemming from volatility in the output gap, inflation and relative prices. We use a model that accounts for both the heterogeneity observed in the degree of price rigidity across regions and sectors, and the asymmetry of real disturbances in relative prices. Our work shows that the optimal weights to assign to each region or economic sector depend on complex interactions between the degree of price stickiness, a country’s economic size and the distribution of shocks across regions. Moreover, the optimal system of weights is primarily affected by the distribution of real shocks across countries. It follows that there is no simple rule of thumb for establishing the optimal weights for each region or economic sector.

Keywords: optimal monetary policy, euro area regions, asymmetric shocks, asymmetric price stickiness

JEL Classification: E52, F41

Suggested Citation

Bragoli, Daniela and Rigon, Massimiliano and Zanetti, Francesco, Optimal Inflation Weights in the Euro Area (January 21, 2016). Bank of Italy Temi di Discussione (Working Paper) No. 1045. Available at SSRN: https://ssrn.com/abstract=2757079 or http://dx.doi.org/10.2139/ssrn.2757079

Daniela Bragoli

Università Cattolica del Sacro Cuore ( email )

via Necchi 9
Milan
Italy

Massimiliano Rigon (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Francesco Zanetti

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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