Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/114087
Authors: 
Anand, Rahul
Prasad, Eswar
Zhang, Boyang
Year of Publication: 
2015
Series/Report no.: 
IZA Discussion Papers 9219
Abstract: 
In closed or open economy models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We analyze this result in the context of developing economies, where a large proportion of households are credit constrained and the share of food expenditures in total consumption expenditures is high. We develop an open economy model with incomplete financial markets to show that headline inflation targeting improves welfare outcomes. We also compute the optimal price index, which includes a positive weight on food prices but, unlike headline inflation, assigns zero weight to import prices.
Subjects: 
headline inflation
core inflation
monetary policy framework
inflation targeting
financial frictions
JEL: 
E31
E52
E61
Document Type: 
Working Paper

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