01781cas a2200253 a 4500 AALejournalIMF006701 230101c9999 xx r poo 0 0eng d 5.00 USD 9781455205301 1018-5941 BD-DhAAL BD-DhAAL Anand, Rahul. Optimal Price Indices for Targeting Inflation Under Incomplete Markets / Rahul Anand, Eswar Prasad. Washington, D.C. : International Monetary Fund, 2010. 1 online resource (62 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students In models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We develop a two-sector two-good new-Keynesian model to study the optimal choice of price index in markets with financial frictions. We find that, in the presence of financial frictions, a welfare-maximizing central bank should adopt flexible headline inflation targeting a target for headline CPI inflation with some weight on the output gap. These results are particularly relevant for emerging markets, where the share of food expenditures in total consumption expenditures is high and a large proportion of consumers are credit constrained. Mode of access: Internet Prasad, Eswar. IMF Working Papers; Working Paper ; No. 2010/200 Full text available on IMF http://elibrary.imf.org/view/journals/001/2010/200/001.2010.issue-200-en.xml IMF e-Library