On quality bias and inflation targets

Stephanie Schmitt-Grohe and Martín Uribe ()

Journal of Monetary Economics, 2012, vol. 59, issue 4, 393-400

Abstract: Does Ramsey optimal policy call for adjusting the inflation target by the size of the quality bias in measured inflation? We find that if it is nonhedonic (or sticker) prices that are sticky, the conventional view, according to which it is optimal to adjust the inflation target upward by the size of the quality bias, is misguided. Furthermore, we establish that quality improvement is crucial for the determination of the optimal inflation target even in the absence of quality bias. In this case, if nonhedonic prices are sticky, sticker prices should fall at the rate of quality growth.

Date: 2012
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Related works:
Working Paper: On Quality Bias and Inflation Targets (2009)
Working Paper: On Quality Bias and Inflation Targets (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:59:y:2012:i:4:p:393-400

DOI: 10.1016/j.jmoneco.2012.02.002

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