1. This question is based on the article, “Measuring price stability in Covid times,” published by The Center for European Policy Studies (CEPS) on October 20, 2020. The article discusses the use of alternative measures of inflation for macroeconomic policy response to the Covid pandemic in the European Monetary Union (EMU). The article compares three measures of inflation: GDP deflator, the harmonized index of consumer prices (HICP), and the core, which is calculated the same way as HICP, but excludes energy and food items.
LINK to the article ( “Measuring price stability in Covid times,”) : https://www.ceps.eu/measuring-price-stability-in-covid-times/
(a) According to the article, what are the differences between GDP deflator and HICP?
(b) The article argues that policymakers should pay attention to GDP deflator as well as HICP. According to the article, why did attention to GDP deflator matter during and after the financial crisis of late 2000s?
(c) The article claims that since the outbreak of Covid-19, HICP may be understating the actual inflation rate. What is the article’s reasoning for this claim?
(d) According to the article, a temporary policy change in some European countries has reduced the current HICP inflation rate. Since this change will be reversed before long, focusing on the current HICP inflation may lead to incorrect policy decision. What is that policy change? [3] In this context, why would it help if policymakers take account of GDP deflator in addition to HICP at this time?
