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The price of division: sticky prices and monetary policy in a fragmenting world (Q4/25)

Author

Listed:
  • Wolfgang Lechthaler

    (Oesterreichische Nationalbank)

  • Mariya Mileva

    (California State University Long Beach)

Abstract

We develop a dynamic three-region model combining features of modern trade models and macroeconomic models to study the role of nominal rigidities and monetary policy after trade fragmentation shocks. We find that trade fragmentation substantially reduces GDP and persistently raises inflation. Nominal rigidities play an important role in shaping the adjustment process. Monetary policy faces a trade-off between stabilizing inflation and output, but reacting to the surge in inflation with a lag (”looking through”) can reduce the economic downturn at relatively low cost in terms of inflation.

Suggested Citation

  • Wolfgang Lechthaler & Mariya Mileva, 2026. "The price of division: sticky prices and monetary policy in a fragmenting world (Q4/25)," OeNB Bulletin, Oesterreichische Nationalbank (Austrian Central Bank), issue Q4/25-4, pages 1-34.
    • Handle: RePEc:onb:oenbbu:y:2026:i:q4/25-4:b:4
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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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