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Inflation Volatility and Growth in a Stochastic Small Open Economy: A Mixed Jump-Diffusion Approach

Author

Listed:
  • Isela Téllez-León.

    (Escuela Superior de Economía, Instituto Politécnico Nacional.)

  • Francisco Venegas-Martínez.

    (Escuela Superior de Economía, Instituto Politécnico Nacional.)

  • Abigail Rodríguez-Nava.

    (Departamento de Producción Económica, Universidad Autónoma Metropolitana-Xochimilco.)

Abstract

The aim of this paper is to examine how inflation volatility affects economic growth in a small open economy. To reach this goal, a stochastic macroeconomic model with a financial sector and incomplete financial markets (due to the inclusion of jumps) is developed. It is assumed that the general price level is driven by mixed diffusion-jump process, that is, a Brownian motion governs inflation and a Poisson process guides unexpected an sudden jumps in the price index. The economic growth rate is endogenously determined, in the equilibrium, as a function of parameters of the inflation process.

Suggested Citation

  • Isela Téllez-León. & Francisco Venegas-Martínez. & Abigail Rodríguez-Nava., 2011. "Inflation Volatility and Growth in a Stochastic Small Open Economy: A Mixed Jump-Diffusion Approach," Economía: teoría y práctica, Universidad Autónoma Metropolitana, México, vol. 35(2), pages 131-156, Julio-Dic.
    • Handle: RePEc:ety:journl:v:35:y:2011:i:2:p:131-156
    DOI: 10.24275/ETYPUAM/NE/352011/Tellez
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    References listed on IDEAS

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    1. Dornbusch, Rudiger & Frenkel, Jacob A, 1973. "Inflation and Growth: Alternative Approaches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 141-156, Part I Fe.
    2. Giuliano, Paola & Turnovsky, Stephen J., 2003. "Intertemporal substitution, risk aversion, and economic performance in a stochastically growing open economy," Journal of International Money and Finance, Elsevier, vol. 22(4), pages 529-556, August.
    3. Goncalves, Carlos Eduardo S. & Salles, Joao M., 2008. "Inflation targeting in emerging economies: What do the data say?," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 312-318, February.
    4. Hendrik S. Houthhakker, 1979. "Growth and Inflation: Analysis by Industry," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(1), pages 241-257.
    5. Turnovsky, Stephen J, 1993. "Macroeconomic Policies, Growth, and Welfare in a Stochastic Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 953-981, November.
    6. Hnatkovska, Viktoria & Loayza, Norman, 2004. "Volatility and growth," Policy Research Working Paper Series 3184, The World Bank.
    7. Hill, Robert J, 2001. "Measuring Inflation and Growth Using Spanning Trees," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 167-185, February.
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    Cited by:

    1. Robert Cox Merton & Francisco Venegas-Martínez, 2021. "Financial Science Trends and Perspectives: A Review Article," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(1), pages 1-15, Enero - M.

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    More about this item

    Keywords

    inflation; growth; stochastic models.;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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