Working Paper

Inflation persistence, backward-looking firms, and monetary policy in an input-output economy

Abstract: This paper studies the implications of inflation persistence (generated by backward-looking price setters) for monetary policy in a New Keynesian \"input-output\" model--a model with sticky prices in both intermediate and final goods sectors. Optimal policy under commitment depends on the degree of inflation persistence in both sectors. Under discretion, speed-limit targeting--targeting the change in the output gap--outperforms price-level and inflation targeting in the presence of inflation persistence. If inflation persistence is low in the intermediate goods sector, price-level targeting outperforms inflation targeting despite high inflation persistence in the final goods sector.

Keywords: Inflation (Finance); Monetary policy;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2010

Number: 2010-55