Does Ramsey optimal policy call for adjusting the inflation target by the size of the quality bias in measured inflation? We find that if it is nonhedonic (or sticker) prices that are sticky, the conventional view, according to which it is optimal to adjust the inflation target upward by the...

Using panel structural VAR analysis and quarterly data from four industrialized countries, we document that an increase in government purchases raises output and private consumption, deteriorates the trade balance, and depreciates the real exchange rate. This pattern of comovement poses a puzzle...