On Quality Bias and Inflation Targets / Stephanie Schmitt-Grohe, Martin Uribe.

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Schmitt-Grohe, Stephanie

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w15505.Publication details: Cambridge, Mass. National Bureau of Economic Research 2009.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: A policy issue central banks are confronted with is whether inflation targets should be adjusted to account for the systematic upward bias in measured inflation due to quality improvements in consumption goods. We show that in the context of a Ramsey equilibrium the answer to this question depends on what prices are assumed to be sticky. If nonquality-adjusted prices are assumed to be sticky, then the Ramsey plan predicts that the inflation target should not be corrected. If, on the other hand, quality-adjusted (or hedonic) prices are assumed to be sticky, then the Ramsey plan calls for raising the inflation target by the magnitude of the bias.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w15505 (Browse shelf(Opens below))	Not For Loan

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November 2009.

A policy issue central banks are confronted with is whether inflation targets should be adjusted to account for the systematic upward bias in measured inflation due to quality improvements in consumption goods. We show that in the context of a Ramsey equilibrium the answer to this question depends on what prices are assumed to be sticky. If nonquality-adjusted prices are assumed to be sticky, then the Ramsey plan predicts that the inflation target should not be corrected. If, on the other hand, quality-adjusted (or hedonic) prices are assumed to be sticky, then the Ramsey plan calls for raising the inflation target by the magnitude of the bias.