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How Does Global Disinflation Drag Inflation in Small Open Economies?

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  • Marco Vega

    (London School of Economics & Central Bank of Peru)

  • Diego Winkelried

    (Central Bank of Peru)

Abstract

This paper shows the way how persistent world inflation shocks hitting a small open economy can re-weight the importance of domestic and foreign factors in the determination of prices. In this sense, we study why the recently observed global disinflation environment may imply a weakening of the standard interest rate channel of monetary policy to affect inflation. We derive a state-dependent Phillips curve based on translog preferences that make the elasticity of substitution of domestic goods sensitive to foreign prices. With this approach we are able to replicate the dragging effect of global disinflation on domestic inflation, as experienced in small open economies such as New Zealand, Chile and Peru.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0403008.

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Length: 30 pages
Date of creation: 12 Mar 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0403008

Note: Type of Document - pdf; pages: 30
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Web page: http://128.118.178.162

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Keywords: Monetary Policy; Phillips Curve; Translog Preferences; Inflation.;

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References

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Citations

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Cited by:
  1. Diego Winkelried & Juan Francisco Castro & Eduardo Morón, 2004. "Understanding Financial Vulnerability in Partially Dollarized Economies," Econometric Society 2004 Latin American Meetings 260, Econometric Society.
  2. Claudio E. V. Borio & Andrew Filardo, 2007. "Globalisation and inflation: New cross-country evidence on the global determinants of domestic inflation," BIS Working Papers 227, Bank for International Settlements.
  3. Renzo Rossini & Marco Vega, 2007. "The monetary policy transmission mechanism under financial dollarization: the case of Peru 1996-2006," Working Papers 2007-017, Banco Central de Reserva del Perú.
  4. Eduardo Moron & Juan F. Castro & Diego Winkelried, 2004. "Assessing Financial Vulnerability in Partially Dollarized Economies," International Finance 0406002, EconWPA.
  5. Ernest Gnan & Maria Teresa Valderrama, 2006. "Globalization, Inflation and Monetary Policy," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 37–54.
  6. Kenneth S. Rogoff, 2006. "Impact of globalization on monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 265-305.
  7. Rossini, Renzo & Vega, Marco, 2007. "El mecanismo de transmisión de la política monetaria en un entorno de dolarización financiera: El caso del Perú entre 1996 y 2006," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 14, pages 11-32.

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