Currency misalignments, international trade in intermediate inputs, and inflation targeting
Liutang Gong (),
Chan Wang (),
Liyuan Wu () and
Heng-fu Zou ()
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Liutang Gong: Guanghua School of Management and LMEQF, Peking University
Chan Wang: School of Finance, Central University of Finance and Economics
Liyuan Wu: Institute of World Economics and Politics, Chinese Academy of Social Science
Heng-fu Zou: Economics and Management School, Wuhan University
No 617, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics
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.
Pages: 37 pages
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:wpaper:617
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