Micro-Data on Nominal Rigidity, Inflation Persistence and Optimal Monetary Policy

The micro-data on prices indicate that prices, on average, remain unchanged for several months. However, central banks (e. g. European Central Bank) use models for monetary policy analysis that ignore this fact on the grounds that they can explain the persistence of inflation well. In this paper, I evaluate the consequences of implementing policies that are optimal from the perspective of a model that ignores the micro-data. The findings reported in the paper suggest that policy conclusions are significantly affected by whether persistence arises in a manner consistent with the micro-data and that employing models that do not respect micro-data can lead to costly policy mistakes.