Disinflation Dynamics in an Open Economy General Equilibrium Model

Ozge Senay ()

Discussion Papers from Department of Economics, University of York

Abstract: This paper studies money based and exchange rate based disinflation in an open economy model with explicit microfoundations. For benchmark parameter values, it is found that a money slowdown leads to a recession in the short run whereas exchange rate based disinflation leads to very rapid adjustment with minimal real effects. This corresponds to the results of directly postulated models. Overshooting of the exchange rate in response to a money slowdown, however, only occurs when there is pricing-to-market behavior. It is found that by varying certain key parameter values such as the intertemporal rate of discount and the degree of price inertia, exchange rate based stabilization can produce substantial real effects. This contrasts with the results of directly postulated models and is related to issues highlighted by the introduction of microfoundations.

Keywords: disinflation; staggered prices; persistence; dynamic general equilibrium; pricing-to-market (search for similar items in EconPapers)
JEL-codes: E31 F31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon and nep-pub
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