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International transmission of anticipated inflation under alternative exchange-rate regimes

  • Jill A. Holman
  • Felix K. Rioja

This paper studies the international transmission of anticipated inflation. A two-country, two-good, two-currency, cash-in-advance model is used to examine analytically and numerically the consequences of changes in a country's inflation rate. Domestic monetary policy influences real activity at home through an inflation-tax channel. These real effects are transmitted to the foreign country via fluctuations in the real exchange rate. Under a flexible nominal exchange rate, inflation is a beggar-thy-neighbor policy. Under a fixed nominal exchange rate, each country suffers a welfare loss when one country inflates. The quantitative results are fairly insensitive to variations in the cash-credit mix used to finance investment expenditures.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number 99-04.

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Date of creation: 1998
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Handle: RePEc:fip:fedkrw:99-04
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