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/lp/american-economic-association/condi-a-cost-of-nominal-distortions-index-vHPXb2Inns
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- Publisher
- American Economic Association
- Copyright
- Copyright © 2011 by the American Economic Association
- Subject
- Articles
- ISSN
- 1945-7715
- eISSN
- 1945-7715
- DOI
- 10.1257/mac.3.3.53
- Publisher site
- See Article on Publisher Site
Abstract
Abstract We construct a PCE-based price index whose weights minimize the welfare costs of nominal distortions: a cost-of-nominal-distortions index. We compute these weights in a multi-sector New Keynesian model, calibrated to match US data on price stickiness, labor shares, and inflation across sectors. The CONDI weights mostly depend on price stickiness. Moreover, CONDI stabilization leads to negligible welfare losses compared to the optimal policy and is better approximated by core rather than headline inflation targeting. An even better approximation can be obtained with an adjusted core index. (JEL C14, E12, E25, E31, E52 ).
Journal
American Economic Journal: Macroeconomics – American Economic Association
Published: Jul 1, 2011