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

Rahul Anand (), Eswar Prasad and Boyang Zhang ()
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Rahul Anand: International Monetary Fund

No 9219, IZA Discussion Papers from Institute of Labor Economics (IZA)

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: headline inflation; core inflation; monetary policy framework; inflation targeting; financial frictions (search for similar items in EconPapers)
JEL-codes: E31 E52 E61 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2015-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

Published - published in: Journal of Monetary Economics, 2015, 74, 102-116

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