What Measure of Inflation Should a Central Bank Target?
40 Pages Posted: 12 Nov 2002
There are 2 versions of this paper
What Measure of Inflation Should a Central Bank Target?
What Measure of Inflation Should a Central Bank Target?
Date Written: November 2002
Abstract
This paper assumes that a central bank commits itself to maintaining an inflation target and then asks what measure of the inflation rate the central bank should use if it wants to maximize economic stability. The paper first formalizes this problem and examines its microeconomic foundations. It then shows how the weight of a sector in the stability price index depends on the sector's characteristics, including size, cyclical sensitivity, sluggishness of price adjustment, and magnitude of sectoral shocks. When a numerical illustration of the problem is calibrated to U.S. data, one tentative conclusion is that a central bank that wants to achieve maximum economic stability of economic activity should use a price index that gives substantial weight to the level of nominal wages.
Keywords: Inflation targeting, monetary policy
JEL Classification: E42, E52, E58
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
What Measure of Inflation Should a Central Bank Target?
By N. Gregory Mankiw and Ricardo Reis
-
The Specie Standard as a Contingent Rule: Some Evidence for Core and Peripheral Countries, 1880-1990
By Michael D. Bordo and Anna J. Schwartz
-
A Dynamic Measure of Inflation
By Ricardo Reis
-
A Cost-of-Living Dynamic Price Index, with an Application to Indexing Retirement Accounts
By Ricardo Reis
-
Simple Rules, Discretion and Monetary Policy
By Robert P. Flood and Peter Isard
-
The Stability of the Gold Standard and the Evolution of the International Monetary System
By Tamim Bayoumi and Barry Eichengreen
-
Rules, Discretion, and Central Bank Independence: The German Experience 1880-1989
-
Real Estate Price Indices for Germany: Past, Present and Future
By Johannes Hoffmann and Andreas Lorenz