Price Subsidies and the Conduct of Monetary Policy
IMF Working Papers, January 1, 2012
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Bibliographic details
- Authors: Nooman Rebei, Mohamed Safouane Ben Aissa
- Published: January 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463931209.001
Summary
- Investigates optimized monetary policy rules when governments stabilize prices for certain categories of goods and services.
- Estimates a small-scale, structural equilibrium model with a sticky-price sector and a subsidized price sector for a large number of countries using Bayesian methods.
- Main conclusion: strict headline inflation targeting can be outperformed by sectoral inflation targeting, output gap stabilization, or a combination of these.
- Identifies country-specific thresholds for the degree of government intervention in price setting under which core inflation targeting is the optimal choice in the context of implementable Taylor rules.
Methodology
- Model: small-scale structural equilibrium model with:
- a sticky-price sector, and
- a subsidized price sector.
- Estimation approach: Bayesian methods.
- Cross-country application: estimated for a large number of countries.
Key findings
- Sectoral inflation targeting, output gap stabilization, or combinations thereof can outperform strict headline inflation targeting.
- Several country cases show lower performance of both headline and core inflation stabilization—the two most common policies in modern central banks' practices.
- For practical policy design, country-specific thresholds for government intervention in price setting determine when core inflation targeting becomes optimal within implementable Taylor rules.
Policy implications and recommendations
- Monetary policy frameworks should account for the presence and degree of government price intervention when choosing an operational target (headline inflation, core inflation, sectoral inflation, output gap).
- Consideration of sectoral price dynamics can improve policy performance relative to strict headline inflation targeting in environments with price subsidies.
- Numerical identification of country-specific intervention thresholds can guide central banks whether to favor core inflation targeting in the design of implementable Taylor rules.
Subjects and keywords (as listed)
- Subjects: Inflation, Inflation targeting, Monetary policy, Price adjustments, Price controls, Prices, Sticky prices
- Keywords: adjustment cost parameter, Africa, Bayesian estimation, core inflation, core inflation inflation targeting, core inflation targeting policy, core inflation targeting regime, general equilibrium, government subsidies, Inflation, inflation stabilization, Inflation targeting, nominal interest rate, optimal monetary policy, parameter estimate, Price adjustments, Price controls, sticky prices, suboptimal headline inflation, Taylor rules, WP
Source: Price Subsidies and the Conduct of Monetary Policy — Nooman Rebei, Mohamed Safouane Ben Aissa; IMF Working Papers (January 1, 2012). https://www.imf.org/en/publications/wp/issues/2016/12/31/price-subsidies-and-the-conduct-of-monetary-policy-25645