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Transitional Dynamics of Disinflation in a Small Open Economy with Heterogeneous Agents

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  • Sunel, Enes

Abstract

This study investigates quantitative properties of the transitional dynamics produced by gradual disinflation in a small open economy inhabited by heterogeneous consumers. The main exercise is to feed the empirically observed declining path for inflation into the calibrated model and account for its macroeconomic, distributional and welfare effects under alternative fiscal arrangements. The results show that (i) when uniform transfers are endogenous, gradual decline in the inflation rate from 14.25% to 2.25% increases aggregate welfare by 0.28%. (ii) When wasteful spending is endogenous, aggregate welfare increases by 0.53%. These welfare effects are substantially different from those implied by steady state comparisons. This is because when transition is accounted for, fiscal variables do not jump to their low inflation steady state levels immediately.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39690.

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Date of creation: 26 Jun 2012
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Handle: RePEc:pra:mprapa:39690

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Keywords: Small open economy; incomplete markets; welfare effects of inflation;

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