What Measure of Inflation Should a Central Bank Target?

By N. Mankiw, Ricardo Reis. Social Science Research Network, 2003

219 citations recorded by the source corpus.

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 stability of economic activity should use a price index that gives substantial weight to the level of nominal wages.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/077c8cba123a0de47411e7e5f36c58458dd3a624

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Citations in the corpus

Memories of High Inflation (2012, background): “Mankiw and Reis (2003) model this problem, using representative consumers, yet heterogeneous sectors that can differ with regard to their size, cyclical sensitivity, price rigidities or magnitude of sectoral shocks.”
The Effect of Monetary Policy on Real Commodity Prices (2006, background): “Among many possible references are Bernanke et al. (1999), Mankiw and Reis (2003), Svensson (1995, 1999), Svennson and Woodford (2005), and Truman (2003). currency to depreciate.20 Consumer Price Index targeting actually has the implication that you tighten monetary policy so as to appreciate the…”
Understanding the Greenspan Standard (2005, background): “Notice that it is misperceptions, especially workers’ misconceptions, of productivity growth that convert the rise in the growth rate of potential GDP into a decline in the NAIRU.87 87 On this, see Blinder and Yellen (2001), Ball and Moffitt (2001) and Mankiw and Reis (2003b).”
Capital controls and optimal Chinese monetary policy (2015, background): “…include a model with sticky prices and sticky nominal wages (Erceg, Henderson, and Levin, 2000), a model with sticky prices in multiple sectors (Mankiw and Reis, 2003; Huang and Liu, 2005), and a model with multiple countries (Benigno, 2004; Liu and Pappa, 2008).5 In our benchmark model with a…”
Linkages between inflation, economic growth and terrorism in Pakistan (2013, background): “Furthermore, Mankiw and Reis, (2003) pointed out that “most people earn”