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Discussion Paper Details

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Title: On Quality Bias and Inflation Targets

Author(s): Stephanie Schmitt-Grohé and Martín Uribe

Publication Date: November 2009

Keyword(s): Inflation Targets, Quality Bias and Ramsey Policy

Programme Area(s): International Macroeconomics

Abstract: This paper studies whether the central bank should adjust its inflation target to account for the systematic upward bias in measured inflation due to quality improvements in consumption goods. We show that the answer to this question depends on what prices are assumed to be sticky. If nonquality-adjusted prices are assumed to be sticky, then the inflation target should not be corrected. If, on the other hand, quality-adjusted (or hedonic) prices are assumed to be sticky, then the inflation target should be raised by the magnitude of the bias.

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Bibliographic Reference

Schmitt-Grohé, S and Uribe, M. 2009. 'On Quality Bias and Inflation Targets'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7550