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International transmission of anticipated inflation under alternative exchange-rate regimes

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Jill A. Holman
Felix K. Rioja

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Abstract

This paper studies the international transmission of anticipated inflation. A two-country, two-good, two-currency, cash-in-advance model is used to examine analytically and numerically the consequences of changes in a country's inflation rate. Domestic monetary policy influences real activity at home through an inflation-tax channel. These real effects are transmitted to the foreign country via fluctuations in the real exchange rate. Under a flexible nominal exchange rate, inflation is a beggar-thy-neighbor policy. Under a fixed nominal exchange rate, each country suffers a welfare loss when one country inflates. The quantitative results are fairly insensitive to variations in the cash-credit mix used to finance investment expenditures.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number 99-04.

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Date of creation: 1998
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Handle: RePEc:fip:fedkrw:99-04

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Keywords: Foreign exchange rates Inflation (Finance)

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  1. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393. [Downloadable!] (restricted)
  2. Fender, John & Yip, Chong K., 1994. "Open economy macroeconomics under imperfect competition A two-country model," Journal of International Economics, Elsevier, vol. 37(1-2), pages 49-63, August. [Downloadable!] (restricted)
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  3. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
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  4. Palivos, Theodore & Yip, Chong K, 1995. "Government Expenditure Financing in an Endogenous Growth Model: A Comparison," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1159-78, November. [Downloadable!] (restricted)
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  5. Schlagenhauf, Don E. & Wrase, Jeffrey M., 1995. "Exchange rate dynamics and international effects of monetary shocks in monetary, equilibrium models," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 155-177, April. [Downloadable!] (restricted)
  6. Stockman, Alan C. & Stockman, Alan C., 1983. "Real exchange rates under alternative nominal exchange-rate systems," Journal of International Money and Finance, Elsevier, vol. 2(2), pages 147-166, August. [Downloadable!] (restricted)
  7. Svensson, Lars E O & van Wijnbergen, Sweder, 1989. "Excess Capacity, Monopolistic Competition, and International Transmission of Monetary Disturbances," Economic Journal, Royal Economic Society, vol. 99(397), pages 785-805, September. [Downloadable!] (restricted)
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  8. Glick, Reuven & Kretzmer, Peter & Wihlborg, Clas, 1995. "Real exchange rate effects of monetary disturbances under different degrees of exchange rate flexibility: An empirical analysis," Journal of International Economics, Elsevier, vol. 38(3-4), pages 249-273, May. [Downloadable!] (restricted)
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  9. Andrew B. Abel, 1986. "Dynamic Behavior of Capital Accumulation in a Cash-in-Advance Model," NBER Working Papers 1549, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Oxford University Press, vol. 18(2), pages 203-20, April.
  11. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August. [Downloadable!] (restricted)
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  12. Wang, Ping & Yip, Chong K, 1992. "Alternative Approaches to Money and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(4), pages 553-62, November. [Downloadable!] (restricted)
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  1. Jeffrey A. Frankel & Sergio L. Schmukler & Luis Serven, 2002. "Global Transmission of Interest Rates: Monetary Independence and Currency Regime," NBER Working Papers 8828, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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