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Inflation Volatility and Growth in a Stochastic Small Open Economy: A Mixed Jump-Diffusion Approach

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  • Isela Téllez-León.

    ()
    (Escuela Superior de Economía, Instituto Politécnico Nacional.)

  • Francisco Venegas-Martínez.

    ()
    (Escuela Superior de Economía, Instituto Politécnico Nacional.)

  • Abigail Rodríguez-Nava.

    ()
    (Departamento de Producción Económica, Universidad Autónoma Metropolitana-Xochimilco.)

Abstract

The aim of this paper is to examine how inflation volatility affects economic growth in a small open economy. To reach this goal, a stochastic macroeconomic model with a financial sector and incomplete financial markets (due to the inclusion of jumps) is developed. It is assumed that the general price level is driven by mixed diffusion-jump process, that is, a Brownian motion governs inflation and a Poisson process guides unexpected an sudden jumps in the price index. The economic growth rate is endogenously determined, in the equilibrium, as a function of parameters of the inflation process.

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Bibliographic Info

Article provided by Economía: teoría y práctica in its journal Economía: teoría y práctica..

Volume (Year): 35 (2011)
Issue (Month): 2 (Julio-Diciembre)
Pages: 131-156

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Handle: RePEc:ety:journl:v:35:y:2011:i:2:p:131-156

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Keywords: inflation; growth; stochastic models.;

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  1. Paola Giuliano & Stephen Turnovsky, 2000. "Intertemporal Substitution, Risk Aversion, and Economic Performance in a Stochastically Growing Open Economy," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 0002, Department of Economics at the University of Washington.
  2. Hendrik S. Houthhakker, 1979. "Growth and Inflation: Analysis by Industry," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 10(1), pages 241-257.
  3. Dornbusch, Rudiger & Frenkel, Jacob A, 1973. "Inflation and Growth: Alternative Approaches," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 5(1), pages 141-56, Part I Fe.
  4. Goncalves, Carlos Eduardo S. & Salles, Joao M., 2008. "Inflation targeting in emerging economies: What do the data say?," Journal of Development Economics, Elsevier, Elsevier, vol. 85(1-2), pages 312-318, February.
  5. Turnovsky, Stephen J, 1993. "Macroeconomic Policies, Growth, and Welfare in a Stochastic Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 953-81, November.
  6. Hill, Robert J, 2001. "Measuring Inflation and Growth Using Spanning Trees," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 167-85, February.
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