Department of Economics
420 West 118th Street
New York, NY 10027
Institutional Affiliation: Columbia University
NBER Working Papers and Publications
|February 2018||The Wedge of the Century: Understanding a Divergence between CPI and PPI Inflation Measures|
with Shang-Jin Wei: w24319
Two strands of the literature suggest that PPI inflation, rather than CPI inflation, should be the targeting variable in a monetary policy rule. The distinction between these two rules would only be important if the two inflation indices do not co-move strongly. The first contribution of this paper is to document that the two inflation gauges did co-move strongly in the last century but the correlation has fallen substantially since the start of this century. The second contribution is to propose a structural explanation for this divergence based on a lengthening of world production chains since 2000. This theory implies that the decline in the correlation is likely to be permanent and a rethinking of the monetary policy rules has become more important. Our multi-stage multi-country produc...