Hostname: page-component-6898cfcb55-zkb6p Total loading time: 0 Render date: 2026-11-11T10:59:06.809Z Has data issue: false hasContentIssue false
  • English
  • Français

OPTIMAL INFLATION TARGETING RULE UNDER POSITIVE HAZARD FUNCTIONS FOR PRICE CHANGES

Published online by Cambridge University Press:  19 September 2016

Giovanni Di Bartolomeo and
Marco Di Pietro
Giovanni Di Bartolomeo*
Affiliation:
Sapienza University of Rome
Marco Di Pietro
Affiliation:
Sapienza University of Rome
*
Address correspondence to: Giovanni Di Bartolomeo, Dipartimento di Economia e Diritto, Sapienza Università di Roma, via del Castro Laurenziano 9, 00161 Rome, Italy; e-mail: giovanni.dibartolomeo@uniroma1.it.
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

This paper reconsiders optimal inflation targeting in a model where persistence is generated by rational choices of the price makers because of a time-dependent pricing mechanism. In this framework, which generalizes the traditional Calvo model, inflation persistence is intrinsic, as it is micro-founded assuming that firms' pricing decisions depend on the time elapsed from the last price reset. We use a linear–quadratic approach to study the welfare effects and optimal policies. We disentangled two distortion sources showing how welfare falls in both the average of the probability of changing prices and its distribution among different firms. Described the underlying distortions of our setup, we analyze its normative implications for optimal inflation. The issues of uncertainty and robustness are also considered: By using robust control techniques, we, in fact, consider the consequences of implementing a “wrong” monetary rule due to a misinterpretation of sources of inflation inertia.

Keywords

Time-Dependent Price AdjustmentsIntrinsic Inflation PersistenceOptimal Stabilization PolicyPolicy Robustness

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Special Issue 1: Current Macroeconomic Challenges , January 2018, pp. 135 - 152
Copyright
Copyright © Cambridge University Press 2016 

Footnotes

The authors are grateful to two anonymous referees, Barbara Annichiarico, Guido Ascari, Efrem Castelnuovo, Bob Chirinko, Giuseppe Ferrero, Peter McAdam, Salvatore Nisticò, Ricardo Reis, Lorenza Rossi, Massimiliano Tancioni, Patrizio Tirelli, and seminar participants at the Universities of Rome (Sapienza CMC conference), Crete, Manchester, Mannheim (ZEW conference), and Tor Vergata for useful comments on earlier drafts. The authors also acknowledge financial support by Sapienza University of Rome.

References

REFERENCES

Amato, Jeffery D. and Laubach, Thomas (2003) Rule-of-thumb behavior and monetary policy. European Economic Review 47 (5), 791–831.CrossRefGoogle Scholar
Benati, Luca (2008) Investigating inflation persistence across monetary regimes. Quarterly Journal of Economics 123 (3), 1005–1060.CrossRefGoogle Scholar
Benati, L. (2009) Are “Intrinsic Inflation Persistence'' Models Structural in the Sense of Lucas (1976)? ECB working paper series no. 1038.Google Scholar
Benigno, Pierpaolo and Woodford, Michael (2005) Inflation stabilization and welfare: The case of a distorted steady state. Journal of the European Economic Association 3 (6), 1185–1236.CrossRefGoogle Scholar
Benigno, Pierpaolo and Woodford, Michael (2012) Linear-quadratic approximation of optimal policy problems. Journal of Economic Theory 147 (1), 1–42.Google Scholar
Blake, Andrew P. (2001) A “Timeless Perspective'' on Optimality in Forward-Looking Rational Expectations Models. NIESR discussion papers no. 188.Google Scholar
Brainard, William C. (1967) Uncertainty and the effectiveness of policy. American Economic Review 57, 411–425.Google Scholar
Brock, William A., Durlauf, Steven N., Nason, James M., and Rondina, Giacomo (2007) Simple versus optimal rules as guides to policy. Journal of Monetary Economics 54 (5), 1372–1396.Google Scholar
Calvo, Guillermo A. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12 (3), 383–398.Google Scholar
Di Bartolomeo, G. and Di Pietro, M. (2015) Intrinsic Persistence of Wage Inflation in New Keynesian Models of the Business Cycles. Mimeo, Department of Economics and Law, Sapienza University of Rome.Google Scholar
Fuhrer, Jeffrey C. and Moore, George (1995) Inflation persistence. Quarterly Journal of Economics 109 (2), 127–159.Google Scholar
Galí, Jordi (2008), Monetary Policy, Inflation and the Business Cycle: An Introduction to the New Keynesian Framework. Princeton, NJ: Princeton University Press.Google Scholar
Galí, Jordi and Gertler, Mark (1999) Inflation dynamics: A structural econometric analysis. Journal of Monetary Economics 44 (2), 195–222.Google Scholar
Giannoni, Marc P. and Woodford, Michael (2005) Optimal inflation targeting rules. In Bernanke, B. S. and Woodford, M. (eds.), The Inflation Targeting Debate, pp. 93–172. Chicago, IL: University of Chicago Press.Google Scholar
Hansen, Lars P. and Sargent, Thomas J. (2011) Wanting robustness in macroeconomics. In Friedman, B.M. and Woodford, M. (eds.), Handbook of Monetary Economics, vol. 3B, pp. 1097–1157. Amsterdam: Elsevier.Google Scholar
Jensen, Christian and McCallum, Bennett T. (2002) The non-optimality of proposed monetary policy rules under timeless perspective commitment. Economics Letters 77 (2), 163–168.Google Scholar
Rotemberg, Julio J. (1982) Sticky prices in the United States. Journal of Political Economy 90 (6), 1187–1211.Google Scholar
Rotemberg, Julio J. and Woodford, Michael (1997) An optimization-based econometric framework for the evaluation of monetary policy. NBER Macroeconomic Annual 1997, 297–361.CrossRefGoogle Scholar
Rotemberg, Julio J. and Woodford, Michael (1999) Interest rate rules in an estimated sticky price model. In Taylor, J.B. (ed.), Monetary Policy Rules, pp. 57–119. Chicago, IL: The University of Chicago Press.Google Scholar
Savage, Leonard J. (1951) The theory of statistical decision. Journal of the American Statistical Association 46 (253), 55–67.Google Scholar
Sbordone, Argia (2007) Inflation persistence: Alternative interpretations and policy implications. Journal of Monetary Economics 54 (5), 1311–1339.Google Scholar
Sheedy, Kevin D. (2007a) Intrinsic Inflation Persistence. Centre for Economic Performance discussion paper no. 837.Google Scholar
Sheedy, Kevin D. (2007b) Robustly Optimal Monetary Policy. Centre for Economic Performance discussion paper no. 840.Google Scholar
Sheedy, Kevin D. (2010) Intrinsic inflation persistence. Journal of Monetary Economics 57 (8), 1049–1061.Google Scholar
Söderlind, Paul (1999) Solution and estimation of RE macromodels with optimal policy. European Economic Review 43 (4–6), 813–823 Google Scholar
Steinsson, Jon (2003) Optimal monetary policy in an economy with inflation persistence. Journal of Monetary Economics 50, 1425–1456.Google Scholar
Stoye, Jörg (2011) Statistical decisions under ambiguity. Theory and Decision 70 (2), 129–148.CrossRefGoogle Scholar
Svensson, Lars E. O. and Woodford, Michael (2005) Implementing optimal policy through inflation-forecast targeting. In Bernanke, B. S. and Woodford, M. (eds.), The Inflation-Targeting Debate, pp. 19–92. Chicago, IL: University of Chicago Press.Google Scholar
Walsh, C. E. (2010), Monetary Theory and Policy. Cambridge, MA: MIT Press.Google Scholar
Woodford, Michael (1999) Commentary: How should monetary policy be conducted in an era of price stability? New Challenges for Monetary Policy, Federal Reserve Bank of Kansas City, 277–316.Google Scholar
Woodford, Michael (2002) Inflation stabilization and welfare. B.E. Journal of Macroeconomics 2 (1), 1–53.Google Scholar
Woodford, Michael (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar