TY - BOOK ID - 84658405 TI - Optimal Price Indices for Targeting Inflation Under Incomplete Markets AU - Anand, Rahul. AU - Prasad, Eswar. AU - International Monetary Fund. PY - 2010 SN - 1462387012 1455276812 1282847449 9786612847448 1455205303 PB - Washington, D.C. : International Monetary Fund, DB - UniCat KW - Inflation (Finance) KW - Price indexes. KW - Monetary policy. KW - Monetary management KW - Economic policy KW - Currency boards KW - Money supply KW - Price indices KW - Index numbers (Economics) KW - Finance KW - Natural rate of unemployment KW - Inflation KW - Macroeconomics KW - Money and Monetary Policy KW - Price Level KW - Deflation KW - Monetary Policy KW - Policy Objectives KW - Policy Designs and Consistency KW - Policy Coordination KW - Macroeconomics: Consumption KW - Saving KW - Wealth KW - Monetary economics KW - Inflation targeting KW - Consumption KW - Sticky prices KW - Price indexes KW - Monetary policy KW - Prices KW - National accounts KW - Economics KW - Canada UR - https://www.unicat.be/uniCat?func=search&query=sysid:84658405 AB - In models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We develop a two-sector two-good new-Keynesian model to study the optimal choice of price index in markets with financial frictions. We find that, in the presence of financial frictions, a welfare-maximizing central bank should adopt flexible headline inflation targeting a target for headline CPI inflation with some weight on the output gap. These results are particularly relevant for emerging markets, where the share of food expenditures in total consumption expenditures is high and a large proportion of consumers are credit constrained. ER -