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Which inflation to target? A small open economy with sticky wages indexed to past inflation

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dc.contributor.author Campolmi, Alessia
dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa
dc.date.accessioned 2017-07-26T10:50:54Z
dc.date.available 2017-07-26T10:50:54Z
dc.date.issued 2006-03-01
dc.identifier https://econ-papers.upf.edu/ca/paper.php?id=961
dc.identifier.uri http://hdl.handle.net/10230/372
dc.description.abstract In a closed economy context there is common agreement on price inflation stabilization being one of the objects of monetary policy. Moving to an open economy context gives rise to the coexistence of two measures of inflation: domestic inflation (DI) and consumer price inflation (CPI). Which one of the two measures should be the target variable? This is the question addressed in this paper. In particular, I use a small open economy model to show that once sticky wages indexed to past CPI inflation are introduced, a complete inward looking monetary policy is no more optimal. I first, derive a loss function from a second order approximation of the utility function and then, I compute the fully optimal monetary policy under commitment. Then, I use the optimal monetary policy as a benchmark to compare the performance of different monetary policy rules. The main result is that once a positive degree of indexation is introduced in the model the rule performing better (among the Taylor type rules considered) is the one targeting wage inflation and CPI inflation. Moreover this rule delivers results very close to the one obtained under the fully optimal monetary policy with commitment.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.relation.ispartofseries Economics and Business Working Papers Series; 961
dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.title Which inflation to target? A small open economy with sticky wages indexed to past inflation
dc.type info:eu-repo/semantics/workingPaper
dc.date.modified 2017-07-23T02:10:33Z
dc.subject.keyword inflation
dc.subject.keyword open economy
dc.subject.keyword sticky wages
dc.subject.keyword indexation
dc.subject.keyword Macroeconomics and International Economics
dc.rights.accessRights info:eu-repo/semantics/openAccess

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