What Measure of Inflation Should a Developing Country Central Bank Target?
Electronic Access:
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Summary:
In closed or open economy models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We analyze this result in the context of developing economies, where a large proportion of households are credit constrained and the share of food expenditures in total consumption expenditures is high. We develop an open economy model with incomplete financial markets to show that headline inflation targeting improves welfare outcomes. We also compute the optimal price index, which includes a positive weight on food prices but, unlike headline inflation, assigns zero weight to import prices.
Series:
Working Paper No. 15/205
Subject:
Central banks Developing countries Econometric models Inflation measurement Inflation targeting Monetary policy
English
Publication Date:
September 23, 2015
ISBN/ISSN:
9781513572574/1018-5941
Stock No:
WPIEA2015205
Format:
Paper
Pages:
37
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