Inflation Persistence and Optimal Monetary Policy in the Euro Area

By Pierpaolo Benigno, D. López-Salido. Social Science Research Network, 2002

209 citations recorded by the source corpus.

In this paper we present an optimizing-agent model for the euro area to emphasize how the existence of heterogeneity in inflation persistence across regions matters for the design of monetary policy. We find supporting evidence of the existence of such a heterogeneity in inflation dynamics across euro area countries. In particular, based on the estimation of New Keynesian Phillips Curves for five major countries of the euro area, we find that inflation in Germany has a dominant forward-looking component, while in the other group of countries inflation show a significant inertial (backward looking) behavior. Under this circumstance, we study the welfare implications of four monetary policy rules following terms-of-trade shocks: fully optimal, optimal inflation targeting, HICP targeting, and output gap stabilization.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/62c3fbb54c9d340283893125cb47801838c59389

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Citations in the corpus

Background studies for the ECB's evaluation of its monetary policy strategy (2003, background): “Benigno (2003) and Benigno and López-Salido (2002), in dynamic general equilibrium 112 Camba-Mendez, García and Rodríguez Palenzuela 39 The results in Sinn and Reuter (2001) would seem to overestimate the Balassa-Samuelson effect and indeed they suggest a very high degree of dispersion compared to…”
Fiscal and Monetary Rules for a Currency Union (2009, methodology): “The consumption Euler equation derives from substituting the expression for the stochastic discount factor [8] into the no-arbitrage condition [9]”
Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve (2014, methodology): “Benigno and López-Salido (2006) find some heterogeneity in estimated coefficients for major Eurozone countries. Eichenbaum and Fisher (2004, 2007) evaluate a variant of the NKPC with price indexation that was developed by Christiano et al. (2005), and they also introduce variable elasticity of deman”