Optimal Monetary Policy under Sectoral Heterogeneity in Inflation Persistence

Optimal Monetary Policy under Sectoral Heterogeneity in Inflation Persistence

Title : Optimal Monetary Policy under Sectoral Heterogeneity in Inflation Persistence
Number : 10/04
Author(s) : Sevim Kösem-Alp
Language : English
Date : March 2010
Abstract : This paper analyzes the relevance of sectoral inflation persistence differentials for optimal monetary policy using a two-sector sticky price model, which generalizes the standard models by introducing backward looking price setting into both sectors. The results show that even if the sectors have the same degree of inflation persistence, optimal inflation targeting policy attaches different weights to these unless they have exactly the same price setting mechanism. In particular, different combinations of price change frequency and backward looking price setting parameters can produce the same inflation persistence but have different implications for the optimal inflation targeting policy. However, the optimal inflation targeting rule attaches a higher weight to the inflation of the sector with a flatter Philips curve whether it is more persistent or not.
Keywords : Relative prices, Optimal monetary policy, Inflation persistence
JEL Codes : E31, E32, E52

 

Optimal Monetary Policy under Sectoral Heterogeneity in Inflation Persistence
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