Price Subsidies and the Conduct of Monetary Policy

By Nooman Rebei, Mohamed Safouane Ben Aissa

January 1, 2012

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Nooman Rebei, and Mohamed Safouane Ben Aissa. Price Subsidies and the Conduct of Monetary Policy, (USA: International Monetary Fund, 2012) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper investigates optimized monetary policy rules in the presence of government intervention to stabilize prices of certain categories of goods and services. The paper estimates a small-scale, structural equilibrium model with a sticky-price sector and a subsidized price sector for a large number of countries using Bayesian methods. The main result of this paper is that strict headline inflation targeting could be outperformed by sectoral inflation targeting, output gap stabilization, or a combination of these. In addition, several country cases exhibit lower performance of both headline and core inflation stabilization, the two most common policies in modern central banks' practices. For practical monetary policy design, we numerically identify country specific thresholds for the degree of government intervention in price setting under which core inflation targeting turns out to be the optimal choice in the context of implementable Taylor rules.

Subject: Inflation, Inflation targeting, Monetary policy, Price adjustments, Price controls, Prices, Sticky prices

Keywords: Adjustment cost parameter, Africa, Bayesian estimation, Core inflation, Core inflation inflation targeting, Core inflation targeting policy, Core inflation targeting regime, General equilibrium, Government subsidies, Inflation, Inflation stabilization, Inflation targeting, Nominal interest rate, Optimal monetary policy, Parameter estimate, Price adjustments, Price controls, Sticky prices, Suboptimal headline inflation, Taylor rules, WP

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/015
Stock No:

WPIEA2012015
ISBN:

9781463931209
ISSN:

1018-5941

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