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).
"CONDI: A Cost-of-Nominal-Distortions Index." American Economic Journal: Macroeconomics,
Semiparametric and Nonparametric Methods: General
General Aggregative Models: Keynes; Keynesian; Post-Keynesian
Aggregate Factor Income Distribution
Price Level; Inflation; Deflation