"CONDI: A Cost-Of-Nominal-Distortions Index

Abstract

We construct a price index with weights on the prices of di¤erent PCE goods chosen to minimize the welfare costs of nominal distortions: a cost-of-nominal-distortions index (CONDI). We compute these weights in a multi-sector New-Keynesian model with time-dependent price setting, calibrated using U.S. data on the dispersion of price stickiness and labor shares across sectors. We …nd that the CONDI weights mostly depend on price stickiness and are less a¤ected by the dispersion in labor shares. Moreover, CONDI stabilization leads to negligible welfare losses compared to the optimal policy and is better approximated by core rather than headline in ‡ation targeting. An even better approximation of the CONDI can be obtained with an adjusted core index that covers total expenditures excluding autos, clothing, energy, and food at home, but that includes food away from home.

The Cross-Sectional Distribution of Price Stickiness Implied by Aggregate Data

“…The experience with our semi-structural model suggests that combining microeconomic information and macroeconomic data within a Bayesian framework can help us integrate our views on price setting at the microeconomic and macroeconomic levels. Quantitative normative analysis in models with heterogeneity in price stickiness, along the lines of Eusepi et al (2009), might also bene…t from such a combination.…”

Relative Prices and Inflation Stabilization

“…However, Benigno (2004) shows that the optimal measure of inflation to be targeted is a weighted sum of the inflation measures in the two sectors, and the optimal weight depends on the degree of price stickiness in each sector. As a quantitative exercise, Eusepi et al (2011) construct a price index whose weights minimize the welfare cost of nominal price stickiness. They compute these weights in a 15-sector New Keynesian model for the US economy and show that their weights depend mainly on the degree of price stickiness.…”

La inflación de los precios rígidos en Colombia

“…Este hecho fué formalizado por (Aoki, 2001) y extendido por (Benigno, 2004). Véase (Mishkin, 2007), (Plosser, 2008) y (Eusepi, Hobijn, & Tambalotti, 2011) también. Sin embargo, estos resultados surgen de supuestos muy particulares sobre el grado y velocidad del passthrough o Traspaso de la Tasa de Cambio, TTC, el grado de utilización de importados en la producción local y la magnitud de las rigideces de los salarios.…”