Does It Matter (for Equilibrium Determinacy) What Price Index the Central Bank Targets?

Charles Carlstrom, Timothy Fuerst and Fabio Ghironi

No 533, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: 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.

Keywords: Determinacy; Sectoral Taylor Rule; Taylor Principle (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2002-04-23, Revised 2003-02-07
New Economics Papers: this item is included in nep-cba and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Journal Article: Does it matter (for equilibrium determinacy) what price index the central bank targets? (2006)
Working Paper: Does it matter (for equilibrium determinacy) what price index the central bank targets? (2002)
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