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How Does a Global Disinflation Drag Inflation in Small Open Economies?

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  • Marco Vega

    ()

    (LSE and Central Bank of Peru)

  • Diego Winkelreid

    (Central Bank of Peru)

Abstract

This paper shows how persistent world inflation shocks hitting a small open economy can re-weight the importance of domestic and foreign factors in the determination of prices. In particular, we study why a global disinflation environment may imply a weakening of the channels whereby domestic shocks affect inflation. We derive a state-dependent Phillips curve based on translog preferences that make the elasticity of substitution of domestic goods sensitive to foreign prices. With this approach we are able to replicate this dragging effect of global disinflation on domestic inflation. We also provide empirical evidence from a wide panel of countries to support the significance of such an effect.

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Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2005-001.

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Date of creation: Jan 2005
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Handle: RePEc:rbp:wpaper:2005-001
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Keywords: Phillips Curve; Translog Aggregator; Competitiveness;

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Find related papers by JEL classification:
  • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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Cited by:

  1. Renzo Rossini & Marco Vega, 2007. "The monetary policy transmission mechanism under financial dollarization: the case of Peru 1996-2006," Working Papers 2007-017, Banco Central de Reserva del Perú.
  2. Ernest Gnan & Maria Teresa Valderrama, 2006. "Globalization, Inflation and Monetary Policy," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 37–54.
  3. Eduardo Moron & Juan F. Castro & Diego Winkelried, 2004. "Assessing Financial Vulnerability in Partially Dollarized Economies," International Finance 0406002, EconWPA.
  4. Doug Dyer & Majdi Quttainah & Pengfei Ye, 2015. "Privatization, intermediation and performance: global evidence," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 5(2), pages 207-229, December.
  5. Kenneth S. Rogoff, 2006. "Impact of globalization on monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 265-305.
  6. Claudio E. V. Borio & Andrew Filardo, 2007. "Globalisation and inflation: New cross-country evidence on the global determinants of domestic inflation," BIS Working Papers 227, Bank for International Settlements.
  7. Diego Winkelried & Juan Francisco Castro & Eduardo Morón, 2004. "Understanding Financial Vulnerability in Partially Dollarized Economies," Econometric Society 2004 Latin American Meetings 260, Econometric Society.
  8. Rossini, Renzo & Vega, Marco, 2007. "El mecanismo de transmisión de la política monetaria en un entorno de dolarización financiera: El caso del Perú entre 1996 y 2006," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 14, pages 11-32.

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