A quantitative analysis of cost-push shocks and optimal inflation volatility


Senay O., Sutherland A.

APPLIED ECONOMICS LETTERS, vol.15, no.10, pp.753-757, 2008 (Peer-Reviewed Journal) identifier identifier

  • Publication Type: Article / Article
  • Volume: 15 Issue: 10
  • Publication Date: 2008
  • Doi Number: 10.1080/13504850600770954
  • Journal Name: APPLIED ECONOMICS LETTERS
  • Journal Indexes: Social Sciences Citation Index, Scopus
  • Page Numbers: pp.753-757

Abstract

This article presents a quantitative analysis of optimal inflation volatility in a simple sticky-price general equilibrium model subject to both supply and cost-push shocks. It is found that optimal policy implies a relatively small degree of inflation volatility even when cost-push shocks are the dominant source of economic disturbance. In addition, it is found that optimal policy generates only a very small welfare gain when compared to strict inflation targeting.