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Foreign Inflation Transmission under Flexible Exchange Rates and Currency Substitution

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  • Rogers, John H

Abstract

The dynamic and steady-state effects of a permanent, unanticipated increase in foreign inflation on a small open economy are analyzed under flexible exchange rates and currency substitution. The velocity of domestic money, and consequently the domestic inflation rate, may rise along the transition path to steady state, but only if demand for foreign currency is sufficiently elastic such that the substitution from foreign to domestic money on impact is "large." Higher foreign inflation is transmitted negatively when demand is inelastic. All else constant, a higher initial level of foreign real balances increases the magnitude of the transmission effects. Copyright 1990 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 22 (1990)
Issue (Month): 2 (May)
Pages: 195-208

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Handle: RePEc:mcb:jmoncb:v:22:y:1990:i:2:p:195-208

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Kem Reat Viseth, 2001. "Currency Substitution and Financial Sector Developments in Cambodia," International and Development Economics Working Papers idec01-4, International and Development Economics.
  2. Lubos Komarek & Martin Melecky, 2001. "Currency Substitution in the Czech Republic 1993-2001," Archive of Monetary Policy Division Working Papers 2001/40, Czech National Bank.
  3. Agenor, Pierre-Richard, 1995. "Monetary shocks and exchange rate dynamics with informal currency markets," International Review of Economics & Finance, Elsevier, vol. 4(3), pages 211-226.
  4. Adenutsi, Deodat E. & Yartey, Charles A., 2007. "Financial sector development and the macrodynamics of ‘de facto’ dollarisation in developing countries: the case of Ghana," MPRA Paper 29333, University Library of Munich, Germany.

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