Inflation Persistence and Optimal Monetary Policy in the Euro Area

Benigno, Pierpaolo and López-Salido, David (2002) Inflation Persistence and Optimal Monetary Policy in the Euro Area. [Discussion Paper]. Board of Governors of the Federal Reserve System (U.S.). p. 40. FRB International Finance Discussion Papers (No. 749).

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Abstract/Index

In this paper we first present supporting evidence of the existence of heterogeneity in inflation dynamics across euro area countries. Based on the estimation of New Phillips Curves for five major countries of the euro area, we find that there is significant inertial (backward looking) behavior in inflation in four of them, while inflation in Germany has a dominant forward looking component. In the second part of the paper we present an optimizing agent model for the euro area emphasizing the heterogeneity in inflation persistence across regions. Allowing for such a backward looking component will affect the evaluation of the degree of nominal rigidities relevant for the monetary policy design. We explore the welfare implications of this circumstance by comparing the adjustment of the economies and the area as a whole in response to terms-of-trade shocks under four monetary policy rules: fully optimal, optimal inflation targeting, HICP targeting and output gap stabilization.


Item Type:Report / Paper (Discussion Paper)
Research documents and activity classification:Working Papers > Non-Refereed Working Papers / of national relevance only
Divisions:Department of Business and Management
Uncontrolled Keywords:Optimal Monetary Policy, Currency Areas, Inflation Dynamics.
MIUR Scientific Area:Area 13 - Economics and Statistics > SECS-P/01 Political Economy
Deposited By:Maria Teresa Nistico
Deposited On:12 Nov 2010 11:17
Last Modified:30 Nov 2010 13:03

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