Trend inflation and exchange rate dynamics: A new Keynesian approach

Takashi Kano

Journal of International Money and Finance, 2024, vol. 146, issue C

Abstract: This study examines the exchange rate implications of trend inflation within a two-country New Keynesian (NK) model. An NK Phillips curve generalized by trend inflation makes the inflation differential smoother, more persistent, and less sensitive to the real exchange rate. A Bayesian analysis with post-Bretton Woods data for Canada and the U.S. shows that the model's equilibrium, which relies on Taylor rules with a persistent trend inflation shock and strong policy inertia, mimics empirical regularities in exchange rates that are difficult to reconcile within a standard NK model. Trend inflation helps explain the empirical puzzles of the exchange rate dynamics.

Keywords: Real and nominal exchange rates; Trend inflation; New Keynesian model; Bayesian analysis (search for similar items in EconPapers)
JEL-codes: E31 E52 F31 F41 (search for similar items in EconPapers)
Date: 2024
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Related works:
Working Paper: Trend Inflation and Exchange Rate Dynamics: A New Keynesian Approach (2021)
Working Paper: Trend inflation and exchange rate dynamics: A New Keynesian approach (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:146:y:2024:i:c:s0261560624001153

DOI: 10.1016/j.jimonfin.2024.103128

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