Working Paper

Does it matter (for equilibrium determinacy) what price index the central bank targets?

Abstract: What inflation rate should the central bank target? The authors address determinacy issues related to this question in a two-sector model in which prices can differ in equilibrium. They assume that the degree of nominal price stickiness can vary across sectors and that labor is immobile. This paper?s contribution is to demonstrate that a modified Taylor principle holds in this environment. If the central bank elects to target sector A and responds to price movements in this sector with a coefficient greater than unity, then this policy rule will ensure determinacy across all sectors. These results have at least two implications: First, the equilibrium-determinacy criterion does not imply a preference for any particular inflation measure. Second, since the Taylor principle applies at the sectoral level, the principle is unnecessary at the aggregate level.

Keywords: Monetary policy; Inflation (Finance); Banks and banking, Central;

https://doi.org/10.26509/frbc-wp-200202

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2002

Number: 0202