International transmission of anticipated inflation under alternative exchange-rate regimes

Jill A. Holman and Felix Rioja

No 99-04, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper studies the international transmission of anticipated inflation. A two-country, two-good, two-currency, cash-in-advance model is used to examine analytically and numerically the consequences of changes in a country's inflation rate. Domestic monetary policy influences real activity at home through an inflation-tax channel. These real effects are transmitted to the foreign country via fluctuations in the real exchange rate. Under a flexible nominal exchange rate, inflation is a beggar-thy-neighbor policy. Under a fixed nominal exchange rate, each country suffers a welfare loss when one country inflates. The quantitative results are fairly insensitive to variations in the cash-credit mix used to finance investment expenditures.

Keywords: Foreign exchange rates; Inflation (Finance) (search for similar items in EconPapers)
Pages: 39 pages
Date: 1999
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Journal Article: International transmission of anticipated inflation under alternative exchange-rate regimes (2001)
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