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Monetary Policy Transmission in a Small Open Economy under Financial and Trade Restrictions

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  • Konstantin Styrin

    (Bank of Russia, Russian Federation)

Abstract

This paper studies how the effect of macroeconomic shocks on inflation depends on the severity of restrictions on international borrowing and imports. Using a calibrated model of a small open economy, I show that the effect of a change in the terms of trade, while being neutral in the absence of these restrictions, becomes inflationary in their presence. Inflation pressures emerge due to a higher interest rate on external borrowing, which is raised in order to pay for imports, and also due to trade costs, which have a direct effect on the domestic price of imported goods. As a consequence, monetary policy in the presence of restrictions on financial and trade transactions becomes tighter

Suggested Citation

  • Konstantin Styrin, 2024. "Monetary Policy Transmission in a Small Open Economy under Financial and Trade Restrictions," Bank of Russia Working Paper Series wps141, Bank of Russia.
    • Handle: RePEc:bkr:wpaper:wps141
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    References listed on IDEAS

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    1. Guido Lorenzoni & Iván Werning, 2023. "A Minimalist Model for the Ruble during the Russian Invasion of Ukraine," American Economic Review: Insights, American Economic Association, vol. 5(3), pages 347-356, September.
    2. Valery Charnavoki & Juan J. Dolado, 2014. "The Effects of Global Shocks on Small Commodity-Exporting Economies: Lessons from Canada," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(2), pages 207-237, April.
    3. Dreger, Christian & Kholodilin, Konstantin A. & Ulbricht, Dirk & Fidrmuc, Jarko, 2016. "Between the hammer and the anvil: The impact of economic sanctions and oil prices on Russia’s ruble," Journal of Comparative Economics, Elsevier, vol. 44(2), pages 295-308.
    4. Bergholt, Drago & Larsen, Vegard H. & Seneca, Martin, 2019. "Business cycles in an oil economy," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 283-303.
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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