What Measure of Inflation Should a Developing Country Central Bank Target?

Rahul Anand, Eswar Prasad and Boyang Zhang

No 2015/205, IMF Working Papers from International Monetary Fund

Abstract: In closed or open economy models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We analyze this result in the context of developing economies, where a large proportion of households are credit constrained and the share of food expenditures in total consumption expenditures is high. We develop an open economy model with incomplete financial markets to show that headline inflation targeting improves welfare outcomes. We also compute the optimal price index, which includes a positive weight on food prices but, unlike headline inflation, assigns zero weight to import prices.

Keywords: WP; core inflation; headline inflation; subsistence level; Inflation targeting; monetary policy framework; financial frictions; core inflation inflation targeting; headline inflation inflation targeting; food price inflation; headline inflation targeting regime result; headline inflation targeting rule; optimal price index; inflation expectation; Inflation; Sticky prices; Consumption; Price indexes; Africa; Global (search for similar items in EconPapers)
Pages: 37
Date: 2015-09-23
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Citations: View citations in EconPapers (47)

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Journal Article: What measure of inflation should a developing country central bank target? (2015)
Working Paper: What Measure of Inflation Should a Developing Country Central Bank Target? (2015)
Working Paper: What Measure of Inflation Should a Developing Country Central Bank Target? (2015)
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