CONDI: A cost-of-nominal-distortions index

Stefano Eusepi, Bart Hobijn, Andrea Tambalotti

Research output: Contribution to journalArticlepeer-review

11 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)53-91
Number of pages39
JournalAmerican Economic Journal: Macroeconomics
Volume3
Issue number3
DOIs
StatePublished - Jul 1 2011
Externally publishedYes

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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