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Product quality, measured inflation and monetary policy

Author

Listed:
  • Rodnyansky, Alexander
  • Van der Ghote, Alejandro
  • Wales, Daniel

Abstract

This paper proposes a tractable New Keynesian (NK) economy with endogenous adjustment in product quality that nests the canonical framework. Endogenous quality choice reduces the slope of the traditional NK Phillips curve and amplifies the economy’s response to productivity shocks. This leads to a less reactionary monetary policy where model misspecification of imperfectly observable quality adjustments matters more for macroeconomic stabilization than the mismeasurement of those adjustments. With no misperception of product quality by the monetary authority, the principles for optimal monetary policy are, nonetheless, unchanged as the quality extensions to the canonical NK model preserve divine coincidence. JEL Classification: E31, E32, E52, E58

Suggested Citation

  • Rodnyansky, Alexander & Van der Ghote, Alejandro & Wales, Daniel, 2022. "Product quality, measured inflation and monetary policy," Working Paper Series 2680, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222680
    Note: 2828013
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2680~f8243a84cd.en.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    inflation indexes; monetary policy; product quality;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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