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On the impacts of trend inflation in an open economy

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  • Zhao, Hong

Abstract

The implications of trend inflation in an open economy are investigated in a two-country DSGE model. The results show that increasing trend inflation from 2 to 4 percent in the domestic country generates a consumption-equivalent welfare loss of about 0.36 percent and 0.04 percent in the domestic and foreign countries, respectively. The cooperative optimal monetary policy under commitment with positive trend inflation faces a policy trade-off in response to technology shocks. Incorporating trend inflation in an open economy has new dynamics: domestic trend inflation amplifies the spillover effects of a domestic technology shock on foreign countries; trend inflation in foreign countries reinforces these spillover effects through the effect of price dispersion.

Suggested Citation

  • Zhao, Hong, 2022. "On the impacts of trend inflation in an open economy," Journal of International Economics, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:inecon:v:138:y:2022:i:c:s0022199622000800
    DOI: 10.1016/j.jinteco.2022.103648
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    More about this item

    Keywords

    Trend inflation; Business cycles; Open economy macroeconomics;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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