The Macroeconomic Effects of Positive Trend Inflation in a Small Open Economy

Yılmaz Y. Ö., TUNÇ G. İ.

Applied Economics, cilt.54, sa.3, ss.234-248, 2022 (SSCI) identifier identifier

  • Yayın Türü: Makale / Tam Makale
  • Cilt numarası: 54 Sayı: 3
  • Basım Tarihi: 2022
  • Doi Numarası: 10.1080/00036846.2021.1876208
  • Dergi Adı: Applied Economics
  • Derginin Tarandığı İndeksler: Social Sciences Citation Index (SSCI), Scopus, IBZ Online, International Bibliography of Social Sciences, ABI/INFORM, Business Source Elite, Business Source Premier, CAB Abstracts, EconLit, Geobase, Index Islamicus, Public Affairs Index, Veterinary Science Database
  • Sayfa Sayıları: ss.234-248
  • Anahtar Kelimeler: Trend Inflation, Small Open Economy, New Keynesian models, New Keynesian Phillips Curve, Real Exchange Rate, REAL EXCHANGE-RATE, MONETARY-POLICY, STAGGERED PRICES, PERSISTENCE
  • Orta Doğu Teknik Üniversitesi Adresli: Evet

Özet

© 2021 Informa UK Limited, trading as Taylor & Francis Group.The existing New Keynesian open economy literature tends to make the simplifying assumption that there is no trend inflation. In this paper, we reformulate the standard open economy model to account for positive trend inflation. We then employ the model to understand the effects of macroeconomic shocks in a small open economy when trend inflation is positive. Our main finding is that allowing for trend inflation significantly affects the dynamics of the model through real exchange rate dynamics rather than the slope of the New Keynesian Philips Curve. Specifically, higher trend inflation induces modestly more persistent real exchange rates’ responses to the shocks. Further incorporation of trend inflation in an open economy enables us to discuss the Purchasing Power Parity and Delayed Overshooting Puzzles.