A quantitative analysis of cost-push shocks and optimal inflation volatility

Ozge Senay () and Alan Sutherland ()

Applied Economics Letters, 2008, vol. 15, issue 10, pages 753-757

Abstract: This article presents a quantitative analysis of optimal inflation volatility in a simple sticky-price general equilibrium model subject to both supply and cost-push shocks. It is found that optimal policy implies a relatively small degree of inflation volatility even when cost-push shocks are the dominant source of economic disturbance. In addition, it is found that optimal policy generates only a very small welfare gain when compared to strict inflation targeting.

Date: 2008

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