On the impacts of trend inflation in an open economy

Hong Zhao

Journal of International Economics, 2022, vol. 138, issue C

Abstract: The implications of trend inflation in an open economy are investigated in a two-country DSGE model. The results show that increasing trend inflation from 2 to 4 percent in the domestic country generates a consumption-equivalent welfare loss of about 0.36 percent and 0.04 percent in the domestic and foreign countries, respectively. The cooperative optimal monetary policy under commitment with positive trend inflation faces a policy trade-off in response to technology shocks. Incorporating trend inflation in an open economy has new dynamics: domestic trend inflation amplifies the spillover effects of a domestic technology shock on foreign countries; trend inflation in foreign countries reinforces these spillover effects through the effect of price dispersion.

Keywords: Trend inflation; Business cycles; Open economy macroeconomics (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:138:y:2022:i:c:s0022199622000800

DOI: 10.1016/j.jinteco.2022.103648

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