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Nominal Exchange Rate Anchoring Under Inflation Inertia

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Author Info

  • Guillermo Calvo
  • Michael Kumhof
  • Oya Celasun

Abstract

This paper develops a theory of inflation inertia based on forward looking staggered price setting in the nontradable goods sector of a small open economy. Unlike current theories of sticky prices, transitions to a lower steady state inflation rate take time even if they are fully credible, and they are associated with significant output losses in nontradables There is a welfare trade-off between these output losses and the gains from smaller inflationary distortions. Gains exceed losses for most calibrations. The optimal steady state is the Friedman rule.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/30.

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Length: 36
Date of creation: 01 Feb 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/30

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Cited by:
  1. Masten, Igor, 2008. "Optimal monetary policy with Balassa-Samuelson-type productivity shocks," Journal of Comparative Economics, Elsevier, vol. 36(1), pages 120-141, March.
  2. Kolver Hernandez, 2006. "State-Dependent Nominal Rigidities & Disinflation Programs in Small Open Economies," Working Papers 06-13, University of Delaware, Department of Economics.
  3. Fabrizio Coricelli & BoĊĦtjan Jazbec & Igor Masten, 2004. "Exchange Rate Policy and Inflation in Acceding Countries: The Role of Pass-through," William Davidson Institute Working Papers Series 2004-674, William Davidson Institute at the University of Michigan.
  4. Hasan Bakhshi & Pablo Burriel-Llombart & Hashmat Khan & Barbara Rudolf, 2003. "Endogenous price stickiness, trend inflation, and the New Keynesian Phillips curve," Bank of England working papers 191, Bank of England.
  5. Kolver Hernandez, 2004. "Inflation and Output Dynamics with State-Dependent Frequency of Price Changes," Macroeconomics 0411020, EconWPA.

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