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American Economic Journal: Macroeconomics: Vol. 3 No. 3 (July 2011)

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CONDI: A Cost-of-Nominal-Distortions Index

Article Citation

Eusepi, Stefano, Bart Hobijn, and Andrea Tambalotti. 2011. "CONDI: A Cost-of-Nominal-Distortions Index." American Economic Journal: Macroeconomics, 3(3): 53-91.

DOI: 10.1257/mac.3.3.53

Abstract

We construct a PCE-based price index whose weights minimize the welfare costs of nominal distortions: a cost-of-nominal-distortions index. We compute these weights in a multi-sector New Keynesian model, calibrated to match US data on price stickiness, labor shares, and inflation across sectors. The CONDI weights mostly depend on price stickiness. Moreover, CONDI stabilization leads to negligible welfare losses compared to the optimal policy and is better approximated by core rather than headline inflation targeting. An even better approximation can be obtained with an adjusted core index. (JEL C14, E12, E25, E31, E52).

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Authors

Eusepi, Stefano (Federal Reserve Bank of New York)
Hobijn, Bart (Federal Reserve Bank of San Francisco)
Tambalotti, Andrea (Federal Reserve Bank of New York)

JEL Classifications

C14: Semiparametric and Nonparametric Methods: General
E12: General Aggregative Models: Keynes; Keynesian; Post-Keynesian
E25: Aggregate Factor Income Distribution
E31: Price Level; Inflation; Deflation
E52: Monetary Policy

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