CONDI: A Cost-of-Nominal-Distortions Index
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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).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.3.3.53Additional Materials
JEL Classification
- 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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