Nicolas De Roux

On the Endogeneity of Inflation Targeting: Preferences Over Inflation

Over the last quarter of a century, inflation targeting has become a popular monetary regime. Nevertheless, empirical evaluations of IT have shown contradictory results. Part of the reason is that IT in and of itself constitutes an endogenous decision and thus needs to be properly instrumented. In this paper, we show that preferences over inflation constitute a crucial determinant of IT: countries exhibiting greater inflation aversion are more likely to adopt IT.

Back to Basics: Sticky Prices in the Monetary Transmission Mechanism

I use the measures of frequency of price adjustment in Nakamura and Steinsson (2008) to show that stickier price industries have higher levels of output response to monetary policy shocks. Using a Vector Auto-regression model, I build different measures of response to a monetary policy shock of 14 US industries. These measures are shown to be related to the level of price rigidity. More precisely, I find that if firms within an industry change prices twice as often as firms in another industry, output deviation from trend in response to a negative shock of 25 basis points will be 69 percentage points smaller in the less sticky industry. This result is stronger when I account for measurement error in the level of response.