Optimal inflation weights in the euro area

Daniela Bragoli, Massimiliano Rigon () and Francesco Zanetti

No 1045, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This study investigates the appropriate measure of inflation in the euro area that the central bank should adopt in order to minimize social welfare losses stemming from volatility in the output gap, inflation and relative prices. We use a model that accounts for both the heterogeneity observed in the degree of price rigidity across regions and sectors, and the asymmetry of real disturbances in relative prices. Our work shows that the optimal weights to assign to each region or economic sector depend on complex interactions between the degree of price stickiness, a country’s economic size and the distribution of shocks across regions. Moreover, the optimal system of weights is primarily affected by the distribution of real shocks across countries. It follows that there is no simple rule of thumb for establishing the optimal weights for each region or economic sector.

Keywords: optimal monetary policy; euro area regions; asymmetric shocks; asymmetric price stickiness (search for similar items in EconPapers)
JEL-codes: E52 F41 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Optimal Inflation Weights in the Euro Area (2016)
Working Paper: Optimal Inflation Weights in the Euro Area (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1045_16

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