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Exploring International Differences in Inflation Dynamics

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  • Yamin Ahmad

    () (Department of Economics, University of Wisconsin-Whitewater)

  • Olena Mykhaylova

    () (Department of Economics, College of the Holy Cross)

Abstract

Standard closed-economy DSGE models have difficulty replicating the persistence of inflation. We use a multicountry dataset to establish some empirical regularities on persistence and volatility of aggregate consumer prices for 161 countries. We find persistence to be high (low) on average for developed (developing) countries, while volatility is low (high) on average for the same country groupings. We then employ a two-country DSGE framework to investigate the extent to which structural open economy features, such as incomplete exchange rate pass-through, the existence of nontraded goods, and international financial market incompleteness, can help in replicating the persistence and volatility of consumer prices. Our simulation results indicate that nominal price inertia in both wholesale and retail sectors has the potential to reconcile both the persistence and volatility of simulated inflation series with the data. When we simulate inflation series in the version of the model calibrated to a developing-developed country pair by allowing for different price contract durations and export currency choices, we are able to replicate the empirical differences reported in the first part of the paper.

Suggested Citation

  • Yamin Ahmad & Olena Mykhaylova, 2015. "Exploring International Differences in Inflation Dynamics," Working Papers 1509, College of the Holy Cross, Department of Economics.
  • Handle: RePEc:hcx:wpaper:1509
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    Keywords

    Inflation dynamics; persistence; volatility; DSGE modeling; simulations;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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