What Measure of Inflation Should a Central Bank Target? / N. Gregory Mankiw, Ricardo Reis.

Format:

Book

Author/Creator:

Mankiw, N. Gregory.

Contributor:

National Bureau of Economic Research.

Reis, Ricardo.

Series:

Working Paper Series (National Bureau of Economic Research) no. w9375.

NBER working paper series no. w9375

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Summary:

This paper assumes that a central bank commits itself to maintaining an inflation target and then asks what measure of the inflation rate the central bank should use if it wants to maximize economic stability. The paper first formalizes this problem and examines its microeconomic foundations. It then shows how the weight of a sector in the stability price index depends on the sector's characteristics, including size, cyclical sensitivity, sluggishness of price adjustment, and magnitude of sectoral shocks. When a numerical illustration of the problem is calibrated to U.S. data, one tentative conclusion is that a central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages.

Notes:

Print version record

December 2002.