NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

On Quality Bias and Inflation Targets

Stephanie Schmitt-Grohe, Martin Uribe

NBER Working Paper No. 15505
Issued in November 2009
NBER Program(s):   ME

A policy issue central banks are confronted with is whether inflation targets should be adjusted to account for the systematic upward bias in measured inflation due to quality improvements in consumption goods. We show that in the context of a Ramsey equilibrium 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 Ramsey plan predicts that the inflation target should not be corrected. If, on the other hand, quality-adjusted (or hedonic) prices are assumed to be sticky, then the Ramsey plan calls for raising the inflation target by the magnitude of the bias.

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Document Object Identifier (DOI): 10.3386/w15505

Published: On Quality Bias and Inflation Targets (with Martín Uribe), Journal of Monetary Economics, 59, May 2012, 393-400.

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