Currency misalignments, international trade in intermediate inputs, and inflation targeting

Liutang Gong, Chan Wang, Liyuan Wu and Heng-Fu Zou ()

Journal of International Money and Finance, 2023, vol. 134, issue C

Abstract: In the literature on optimal monetary policy in open economies, the presence of local- currency pricing provides a rationale for targeting CPI inflation rather than PPI inflation. In this paper, we reexamine this conclusion by incorporating international trade in intermediate inputs into Engel (2011). We find that the cooperative monetary policymaker should target the final-goods output gaps, the PPI inflation rates at both stages of production, the currency misalignments at both stages of production, and the vertical relative price gaps. Welfare analysis shows that the monetary policymaker should target the weighted average intermediate-goods PPI (WPPI) inflation rather than CPI inflation for most combinations of price stickiness at both stages of production.

Keywords: Vertical production and trade; Optimal monetary policy; Inflation targeting; Welfare (search for similar items in EconPapers)
JEL-codes: E5 F3 F4 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S026156062300044X
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Currency misalignments, international trade in intermediate inputs, and inflation targeting (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:134:y:2023:i:c:s026156062300044x

DOI: 10.1016/j.jimonfin.2023.102843

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().