Product Quality, Measured Inflation and Monetary Policy

43 Pages Posted: 11 Feb 2021

See all articles by Alexander Rodnyansky

Alexander Rodnyansky

University of Cambridge - Faculty of Economics

Alejandro Van der Ghote

European Central Bank (ECB) - Directorate General Research

Daniel Wales

University of Cambridge - Faculty of Economics; University of Cambridge - Christ's College

Date Written: February 9, 2021

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.

Keywords: Monetary Policy, Quality Adjustments, Hedonic Price Indexes, Phillips Curve

JEL Classification: E31, E32, E52, E58

Suggested Citation

Rodnyansky, Alexander and Van der Ghote, Alejandro and Wales, Daniel, Product Quality, Measured Inflation and Monetary Policy (February 9, 2021). Available at SSRN: https://ssrn.com/abstract=3772176 or http://dx.doi.org/10.2139/ssrn.3772176

Alexander Rodnyansky

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

HOME PAGE: http://www.arodnyansky.com

Alejandro Van der Ghote (Contact Author)

European Central Bank (ECB) - Directorate General Research ( email )

Sonnemannstrasse 20
Frankfurt am Main, Hesse D-60314
Germany

HOME PAGE: http://https://sites.google.com/view/avanderghote/home

Daniel Wales

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

University of Cambridge - Christ's College ( email )

St Andrew's Street
Cambridge, CB2 3BU
United Kingdom

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