1. Optimal Monetary Policy with Distinct Core and Headline Inflation Rates
- Author:
- Martin Bodenstein, Christopher J. Erceg, and Luca Guerrieri
- Publication Date:
- 08-2008
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- In a stylized DSGE model with an energy sector, the optimal policy response to an adverse energy supply shock implies a rise in core inflation, a larger rise in headline inflation, and a decline in wage inflation. The optimal policy is well-approximated by policies that stabilize the output gap, but also by a wide array of “dual mandate” policies that are not overly aggressive in stabilizing core inflation. Finally, policies that react to a forecast of headline inflation following a temporary energy shock imply markedly different effects than policies that react to a forecast of core, with the former inducing greater volatility in core inflation and the output gap.
- Topic:
- Economics, Energy Policy, Inflation, and Supply
- Political Geography:
- Global Focus