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

Marco Vega and Diego Winkelreid
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Diego Winkelreid: Central Bank of Peru

No 2005-001, Working Papers from Banco Central de Reserva del Perú

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.

Keywords: Phillips Curve; Translog Aggregator; Competitiveness (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (8)

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Working Paper: How Does Global Disinflation Drag Inflation in Small Open Economies? (2004)
Working Paper: How Does Global Disinflation Drag Inflation in Small Open Economies? (2004)
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