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State-Dependent Nominal Rigidities & Disinflation Programs in Small Open Economies

  • Kolver Hernandez


    (Department of Economics,University of Delaware)

Experiences of high-inflation economies suggest that exchange rate-based (ERB) and money-based (MB) disinflations induce sharply different dynamics in consumption and GDP. I study the role of nominal rigidities to explain such dynamics. I build on Calvo pricing to introduce elements of state-dependent into an otherwise standard small open economy. This new feature delivers state-dependent nominal rigidities (SDNR). Nonlinear simulations show that the model with SDNR generates a dynamic behavior consistent with both ERB and MB disinflations; however the model’s special case with constant nominal rigidities is not successful rationalizing ERB disinflations.

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Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 06-13.

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Length: 38 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:dlw:wpaper:06-13
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