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Product quality, measured inflation and monetary policy

Alexander Rodnyansky, Alejandro Van der Ghote and Daniel Wales

No 2680, Working Paper Series from European Central Bank

Abstract: This paper proposes a tractable New Keynesian (NK) economy with endogenous adjustment in product quality that nests the canonical framework. Endogenous quality choice reduces the slope of the traditional NK Phillips curve and amplifies the economy’s response to productivity shocks. This leads to a less reactionary monetary policy where model misspecification of imperfectly observable quality adjustments matters more for macroeconomic stabilization than the mismeasurement of those adjustments. With no misperception of product quality by the monetary authority, the principles for optimal monetary policy are, nonetheless, unchanged as the quality extensions to the canonical NK model preserve divine coincidence. JEL Classification: E31, E32, E52, E58

Keywords: inflation indexes; monetary policy; product quality (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
Note: 2828013
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222680

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