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Quantifying the Second-Round Effects of Supply-Side Shocks on Inflation

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  • Tibor Hlédik
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    Abstract

    This paper uses a small-scale dynamic rational expectations model based on an open-economy version of Fuhrer-Moore-type staggered wage setting to quantify the second-round effects of selected supply-side shocks and of shocks to the nominal exchange rate on wages and subsequently on inflation. In order to analyse the desired reaction of the central bank to these shocks, optimal time-consistent policy rules are derived within the presented New-Keynesian framework. The conclusions presented in the paper suggest that the second-round effects of shocks to import prices and the nominal exchange rate on inflation should not be ignored in practical policy-making.

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    Bibliographic Info

    Article provided by University of Economics, Prague in its journal Prague Economic Papers.

    Volume (Year): 2004 (2004)
    Issue (Month): 2 ()
    Pages: 121-141

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    Handle: RePEc:prg:jnlpep:v:2004:y:2004:i:2:id:235:p:121-141

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    Related research

    Keywords: optimal policy rules; monetary policy; inflation targeting;

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    References

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    1. Mervyn King, 1996. "How should central banks reduce inflation? - Conceptual issues," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 25-52.
    2. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Finance and Economics Discussion Series 93-17, Board of Governors of the Federal Reserve System (U.S.).
    3. repec:sae:niesru:v:174:y::i:1:p:80-91 is not listed on IDEAS
    4. Nicoletta Batini & Anthony Yates, 2001. "Hybrid inflation and price level targeting," Bank of England working papers 135, Bank of England.
    5. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
    6. Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination In Dynamic Macroeconomic Models," NBER Chapters, in: International Economic Policy Coordination, pages 274-330 National Bureau of Economic Research, Inc.
    7. Soderlind, Paul, 2001. "Monetary policy and the Fisher effect," Journal of Policy Modeling, Elsevier, vol. 23(5), pages 491-495, July.
    8. Marvin Goodfriend, 1990. "Interest rates and the conduct of monetary policy," Working Paper 90-06, Federal Reserve Bank of Richmond.
    9. Blake, Andrew P & Westaway, Peter F, 1996. "Credibility and the Effectiveness of Inflation Targeting Regimes," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(0), pages 28-50, Suppl..
    10. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    11. Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Jaroslava Durčáková, 2011. "Foreign Exchange Rate Regimes and Foreign. Exchange Markets in Transitive Economies," Prague Economic Papers, University of Economics, Prague, vol. 2011(4), pages 309-328.

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