Economics, Econometrics and Finance
4 years ago

Optimal policy response to energy shocks affects inflation rates and wages.

SSRN Electronic Journal
Optimal Monetary Policy with Distinct Core and Headline Inflation Rates
Martin Bodenstein, Christopher J. Erceg, Luca Guerrieri

Paper Summary

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The study looked at how to handle a sudden increase in energy prices in the economy. They found that the best approach involves letting core inflation rise a bit, allowing headline inflation to rise more, and reducing wage inflation. By focusing on stabilizing the output gap, policies can be effective. However, reacting to forecasts of headline inflation after an energy shock can lead to more instability in core inflation and the output gap.