The Impact of Trend Inflation in an Open Economy Model

Fernandez-Corugedo Emilio

No 2007-15, Working Papers from Banco de México

Abstract: Most New Keynesian models are derived under the assumption that inflation is equal to zero in the steady-state and yet most central banks around the world have inflation targets that are greater than such a number. In this paper we consider the open economy (welfare) implications of non-zero steady-state inflation rates both in the domestic and foreign economies. We show that higher inflation rates in the steady-state, both in the domestic and foreign economies, reduce welfare in the domestic economy. We also show that high domestic inflation rates in the steady-state have a more adverse effect on domestic welfare than high foreign inflation rates.

JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 2007-12
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Citations: View citations in EconPapers (3)

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