Domestic and international determinants of optimal inflation measure selection for rule-based monetary policy during an energy price shock

This study examines two questions for a rule-based monetary policy in case of an energy price shock. First, what indicators should a central bank respond to in the event of an energy price shock, and second, what factors influence this choice? A semi-structural New Keynesian-based model is sufficiently adaptable to empirical observations (US and Eurozone in this study) and flexible enough to run alternative scenarios. It evaluates CPI, core inflation, expectation-based approaches, and hybrid measures to determine their effectiveness under varying structural and external conditions. The findings highlight the nuanced considerations necessary for effective monetary policy formulation, demonstrating that domestic economic structures and international policy environments significantly influence the choice of inflation measure. This research emphasises that choosing an optimal inflation measure requires strategic consideration. The study offers new empirical insights, presents simulation results for various scenarios, and confirms previous findings in the literature, contributing to the understanding of optimal inflation-targeting strategies in a globally interconnected context. • Inflation measure selection influences the economic path. • Short- and long-term goals suggest different inflation metrics. • Market competition and sectoral composition influence the impact of inflation measure. • Hybrid inflation measure offers stable, resilient economic outcomes. • International policy coordination enhances utility during energy price shocks.