estimated model considers a monetary policy regime where the central bank targets overall inflation but is also concerned about … monetary authority should respond directly to non-tradable inflation instead of overall inflation. In particular, if … preferences are relatively biased towards inflation stabilization, responding directly to overall inflation results in better …

monetary theory, such as the welfare cost of inflation. It is shown that when money is a vital form of liquidity to meet … uncertain consumption needs, the welfare costs of inflation can be extremely large. With log utility and parameter values that …, agents in our model are willing to reduce consumption by 3% ~ 4% to avoid 10% annual inflation. The astonishingly large …

, unemployment, and inflation from a VAR, based on conditions on the short-term interest rate. Throughout the analysis, we focus on …