How Does Global Disinflation Drag Inflation in Small Open Economies?

Macroeconomics from University Library of Munich, Germany

Abstract: This paper shows the way how persistent world inflation shocks hitting a small open economy can re-weight the importance of domestic and foreign factors in the determination of prices. In this sense, we study why the recently observed global disinflation environment may imply a weakening of the standard interest rate channel of monetary policy to affect inflation. We derive a state-dependent Phillips curve based on translog preferences that make the elasticity of substitution of domestic goods sensitive to foreign prices. With this approach we are able to replicate the dragging effect of global disinflation on domestic inflation, as experienced in small open economies such as New Zealand, Chile and Peru.

Keywords: Monetary Policy; Phillips Curve; Translog Preferences; Inflation. (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2004-03-12
New Economics Papers: this item is included in nep-mac and nep-mon
Note: Type of Document - pdf; pages: 30
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: How Does a Global Disinflation Drag Inflation in Small Open Economies? (2005)
Working Paper: How Does Global Disinflation Drag Inflation in Small Open Economies? (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0403008

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