Beschreibung:
We study what is the optimal measure of inflation that central banks should target given the sectoral characteristics of the economy. For this purpose, we build a New Keynesian model that features two sectors, agriculture and non-agriculture, sticky wages and idiosyncratic productivity shocks. We calibrate the model to replicate the sectoral composition of developing and developed countries. We find that the optimal weights depend on the type of shock hitting the economy. After agricultural productivity shocks, the optimal measure of inflation implies zero weight to agricultural inflation. After non-agricultural productivity shocks, it is optimal to assign full weight to agricultural inflation. The reason is that targeting inflation in the sector unaffected by shocks indirectly contains wage inflation. This prescription is independent of sectoral sizes and relative price rigidities