Monetary Policy Transmission in a Small Open Economy under Financial and Trade Restrictions

Konstantin Styrin ()
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Konstantin Styrin: Bank of Russia, Russian Federation

No wps141, Bank of Russia Working Paper Series from Bank of Russia

Abstract: This paper studies how the effect of macroeconomic shocks on inflation depends on the severity of restrictions on international borrowing and imports. Using a calibrated model of a small open economy, I show that the effect of a change in the terms of trade, while being neutral in the absence of these restrictions, becomes inflationary in their presence. Inflation pressures emerge due to a higher interest rate on external borrowing, which is raised in order to pay for imports, and also due to trade costs, which have a direct effect on the domestic price of imported goods. As a consequence, monetary policy in the presence of restrictions on financial and trade transactions becomes tighter

Keywords: monetary policy transmission; financial restrictions; trade restrictions (search for similar items in EconPapers)
JEL-codes: E52 E58 G01 G28 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2024-12
New Economics Papers: this item is included in nep-mon
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