Currency misalignments, international trade in intermediate inputs, and inflation targeting

Liutang Gong (), Chan Wang (), Liyuan Wu () and Heng-Fu Zou ()
Additional contact information
Liutang Gong: Guanghua School of Management and LMEQF, Peking University
Chan Wang: School of Finance, Central University of Finance and Economics
Liyuan Wu: Institute of World Economics and Politics, Chinese Academy of Social Science

No 617, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: In the literature on optimal monetary policy in open economies, the presence of local-currency pricing provides a rationale for targeting CPI inflation rather than PPI inflation. In this paper, we reexamine this conclusion by incorporating international trade in intermediate inputs into Engel (2011). We find that the cooperative monetary policymaker should target the final-goods output gaps, the PPI inflation rates at both stages of production, the currency misalignments at both stages of production, and the vertical relative price gaps. Welfare analysis shows that the monetary policymaker should target the weighted average intermediate-goods PPI (WPPI) inflation rather than CPI inflation for most combinations of price stickiness at both stages of production.

Pages: 37 pages
Date: 2023-03-31
New Economics Papers: this item is included in nep-int, nep-mac, nep-mon and nep-opm
References: Add references at CitEc
Citations:

Downloads: (external link)
http://down.aefweb.net/WorkingPapers/w617.pdf (application/pdf)

Related works:
Journal Article: Currency misalignments, international trade in intermediate inputs, and inflation targeting (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cuf:wpaper:617

Access Statistics for this paper

More papers in CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics Contact information at EDIRC.
Bibliographic data for series maintained by Qiang Gao ().