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The Inflation-Output Volatility Tradeoff and Exchange Rate Shocks in Mexico and Turkey

  • Alfonso Mendoza V.

Using a standard Vector Autorregresion with Autocorrelated Time Varying Covariances this paper finds evidence of a vertical inflation-output volatility tradeoff in Mexico and Turkey. It is found, contrary to common economic wisdom, that there is no tradeoff between output and inflation so that monetary policy affects only prices. In addition, it is observed that the exchange rate crucially affects the dynamics of prices, inflation and output. The pass-through from exchange rate to inflation is high and significant in both economies and periods of high exchange rate volatility are associated with unstable rates of inflation. Also, in agreement with many other studies, it is shown here that nominal depreciations are contractionary.

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Article provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its journal Central Bank Review.

Volume (Year): 3 (2003)
Issue (Month): 1 ()
Pages: 27-51

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Handle: RePEc:tcb:cebare:v:3:y:2003:i:1:p:27-51
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