Trend Inflation and Exchange Rate Dynamics: A New Keynesian Approach

Takashi Kano and 隆 加納

No HIAS-E-38, Discussion paper series from Hitotsubashi Institute for Advanced Study, Hitotsubashi University

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: 2021-02
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
Note: December 2016 (revised February, 2021)
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Related works:
Journal Article: Trend inflation and exchange rate dynamics: A new Keynesian approach (2024)
Working Paper: Trend inflation and exchange rate dynamics: A New Keynesian approach (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hiasdp:hias-e-38

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