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 language||English (US)|
|Number of pages||39|
|Journal||American Economic Journal: Macroeconomics|
|State||Published - Jul 2011|
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)