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Targeting Inflation, The Effects of Monetary Policy on the CPI and Its Housing Component

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  • Dimitri B. Papadimitriou
  • L. Randall Wray

Abstract

The targets for monetary policy adopted by the Fed in recent years have not proven to be closely correlated with inflation, leading some theorists and policymakers to advocate the use of a price index, such as the consumer price index (CPI), as both the target and the goal of monetary policy. Executive Director Dimitri B. Papadimitriou and Research Associate L. Randall Wray show that such a choice is not wise because the CPI does not accurately reflect market-caused price increases and is not under the control of monetary policy. Their analysis extends beyond that of recent reports to show how and why the transmission mechanisms through which monetary policy is thought to affect the CPI are tenuous at best. The authors focus on the housing component of the CPI to illustrate their point. They conclude that those components of the CPI that to affect have been declining in importance, meaning that to produce a given reduction in the overall rate of inflation will require that monetary policy have an increasingly larger impact on an ever-diminishing portion of the consumer basket. Therefore, careful reconsideration of an alternative ultimate target, such as the rate of economic growth or the unemployment rate, is warranted.

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  • Dimitri B. Papadimitriou & L. Randall Wray, "undated". "Targeting Inflation, The Effects of Monetary Policy on the CPI and Its Housing Component," Economics Public Policy Brief Archive ppb_27, Levy Economics Institute.
    • Handle: RePEc:lev:levppb:ppb_27
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    References listed on IDEAS

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    1. Wynne, Mark A & Sigalla, Fiona D, 1996. "A Survey of Measurement Biases in Price Indexes," Journal of Economic Surveys, Wiley Blackwell, vol. 10(1), pages 55-89, March.
    2. Dimitri B. Papadimitriou & L. Randall Wray, 1995. "The Fed: Wrong Turn in Risky Traffic," Challenge, Taylor & Francis Journals, vol. 38(1), pages 15-21, January.
    3. Daniel L. Thornton, 1988. "The borrowed-reserves operating procedures: theory and evidence," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 30-54.
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    Cited by:

    1. Oren M. Levin-Waldman, "undated". "Automatic Adjustment of the Minimum Wage, Linking the Minimum Wage to Productivity," Economics Public Policy Brief Archive ppb_42, Levy Economics Institute.
    2. L. Randall Wray, "undated". "Why Does The Fed Want Slower Growth?," Economics Policy Note Archive 00-7, Levy Economics Institute.
    3. Oren M. Levin-Waldman, 1997. "Linking the Minimum Wage to Productivity," Economics Working Paper Archive wp_219, Levy Economics Institute.
    4. Oren M. Levin-Waldman, 1998. "Linking the Minimum Wage to Productivity," Macroeconomics 9802015, University Library of Munich, Germany.
    5. L. Wray, 2007. "A Post Keynesian view of central bank independence, policy targets, and the rules versus discretion debate," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 30(1), pages 119-141.

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