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Working Paper

Does It Matter (for Equilibrium Determinacy) What Price Index the Central Bank Targets?

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What inflation rate should the central bank target? We address determinacy issues related to this question in a two-sector model in which prices can differ in equilibrium. We assume that the degree of nominal price stickiness can vary across the sectors and that labor is immobile. The contribution of this paper is to demonstrate that a modified Taylor Principle holds in this environment. If the central bank elects to target sector one, and if it responds with a coefficient greater than unity to price movements in this sector, then this policy rule will ensure determinacy across all sectors. The results of this paper have at least two implications. First, the equilibrium-determinacy criterion does not imply a preference to any particular measure of inflation. Second, since the Taylor Principle applies at the sectoral level, there is no need for a Taylor Principle at the aggregate level.
04.01.2002ISSN 2573-7953 WP 02-02DOI 10.26509/frbc-wp-200202
Keywords determinacy, sectoral taylor rule, taylor principle
JEL Classification Codes E31, E52

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Carlstrom, Charles T., Timothy S. Fuerst, and Fabio Ghironi. 2002. “Does It Matter (for Equilibrium Determinacy) What Price Index the Central Bank Targets? .” Federal Reserve Bank of Cleveland, Working Paper No. 02-02. https://doi.org/10.26509/frbc-wp-200202