Micro data on nominal rigidity, inflation persistence and optimal monetary policy

Engin Kara

No 175, Working Paper Research from National Bank of Belgium

Abstract: The popular Calvo model with indexation (Christiano, Eichenbaum and Evans, 2005) and sticky information (Mankiw and Reis, 2002) model have guided much of the monetary policy discussion. The strength of these approaches is that they can explain the persistence of inflation. However, both of these theories are inconsistent with the micro data on prices. In this paper, I evaluate the consequences of implementing policies that are optimal from the perspective of models that overlook the micro-data. To do so, I employ a Generalized Taylor Economy (GTE) (Dixon and Kara, 2007). While there is no material difference between the GTE and its popular alternatives in terms of inflation persistence, a difference arises when it comes to the micro-data: the GTE is consistent with the micro-data. The findings reported in the paper suggest that policy conclusions are significantly affected by whether persistence arises in a manner consistent with the micro-data and that policies that are optimal from the perspective of the models that are inconsistent with the microdata can lead to large welfare losses in the GTE

Keywords: Inflation persistence; DSGE models; Optimal Monetary Policy (search for similar items in EconPapers)
JEL-codes: E1 E3 E52 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2009-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Micro-Data on Nominal Rigidity, Inflation Persistence and Optimal Monetary Policy (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:200909-14

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