English, Article, Journal or magazine article edition: Does It Matter (for Equilibrium Determinacy) What Price Index the Central Bank Targets? Charles T. Carlstrom; Timothy S. Fuerst; Fabio Ghironi

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Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Does It Matter (for Equilibrium Determinacy) What Price Index the Central Bank Targets?
Author
  • Charles T. Carlstrom
  • Timothy S. Fuerst
  • Fabio Ghironi
Physical Description
  • preprint
Notes
  • What inflation rate should the central bank target? The authors address determinacy issues related to this question in a two-sector model in which prices can differ in equilibrium. They assume that the degree of nominal price stickiness can vary across sectors and that labor is immobile. This paper’s contribution is to demonstrate that a modified Taylor principle holds in this environment. If the central bank elects to target sector A and responds to price movements in this sector with a coefficient greater than unity, then this policy rule will ensure determinacy across all sectors. These results have at least two implications: First, the equilibrium-determinacy criterion does not imply a preference for any particular inflation measure. Second, since the Taylor principle applies at the sectoral level, the principle is unnecessary at the aggregate level.
  • Monetary policy ; Inflation (Finance) ; Banks and banking, Central
  • RePEc:fip:fedcwp:0202
  • What inflation rate should the central bank target? We address determinacy issues related to this question in a two-sector model in which prices can differ in equilibrium. We assume that the degree of nominal price stickiness can vary across the sectors and that labor is immobile. The contribution of this paper is to demonstrate that a modified Taylor Principle holds in this environment. If the central bank elects to target sector one, and if it responds with a coefficient greater than unity to price movements in this sector, then this policy rule will ensure determinacy across all sectors. The results of this paper have at least two implications. First, the equilibrium-determinacy criterion does not imply a preference to any particular measure of inflation. Second, since the Taylor Principle applies at the sectoral level, there is no need for a Taylor Principle at the aggregate level.
  • Determinacy, Sectoral Taylor Rule, Taylor Principle
  • RePEc:boc:bocoec:533
Language
  • English
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