Munich Personal RePEc Archive

What inflation measure should a currency union target?

Barnett, William A. and Wang, Chan and Wang, Xue and Wu, Liyuan (2018): What inflation measure should a currency union target?

[img]
Preview
PDF
MPRA_paper_87035.pdf

Download (456kB) | Preview

Abstract

What is the appropriate inflation target for a currency union, when conducting monetary policy: core inflation or headline inflation? We answer the question in a two-country New Keynesian model with an energy sector. We derive the welfare loss function and find that optimal monetary policy should target output gaps, the terms of trade gap, the Prouder Price Index inflation rates, and the real marginal cost gaps. We use the welfare loss function to evaluate two alternative Taylor-type monetary policy rules. We find that the choice of preferred policy rule depends on the shocks. Specifically, when productivity shocks hit the economy, the policymaker should follow the headline inflation Taylor rule, while the core inflation Taylor rule should be followed when a negative energy endowment shock hits the economy.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.