Title: Inflation targeting
Description: "In an economy with nominal rigidities in both an  intermediate good sector and a finished good sector, and thus with a natural  distinction between CPI and PPI inflation rates, a benevolent central bank  faces a tradeoff between stabilizing the two measures of inflation: a final  output gap, and unique to our model, a real marginal cost gap in the  intermediate sector, so that optimal monetary policy is second-best.  We discuss  how to implement the optimal policy with minimal information requirement and  evaluate the robustness of these simple rules when the central bank may not  know the exact sources of shocks or nominal rigidities.  A main finding is that  a simple hybrid rule under which the short-term interest rate responds to CPI  inflation and PPI inflation results in a welfare level close to the optimum,  whereas policy rules that ignore PPI inflation or PPI sector shocks can result  in significant welfare losses"--Federal Reserve Bank of Philadelphia web site.
Subjects: Inflation (Finance), Mathematical models, Monetary policy, Inflation targeting