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Exploring International Differences in Inflation Dynamics

Yamin Ahmad and Olena Mykhaylova ()
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Olena Mykhaylova: Department of Economics, College of the Holy Cross

Authors registered in the RePEc Author Service: Olena Staveley-O'Carroll ()

No 1509, Working Papers from College of the Holy Cross, Department of Economics

Abstract: Standard closed-economy DSGE models have difficulty replicating the persistence of inflation. We use a multicountry dataset to establish some empirical regularities on persistence and volatility of aggregate consumer prices for 161 countries. We find persistence to be high (low) on average for developed (developing) countries, while volatility is low (high) on average for the same country groupings. We then employ a two-country DSGE framework to investigate the extent to which structural open economy features, such as incomplete exchange rate pass-through, the existence of nontraded goods, and international financial market incompleteness, can help in replicating the persistence and volatility of consumer prices. Our simulation results indicate that nominal price inertia in both wholesale and retail sectors has the potential to reconcile both the persistence and volatility of simulated inflation series with the data. When we simulate inflation series in the version of the model calibrated to a developing-developed country pair by allowing for different price contract durations and export currency choices, we are able to replicate the empirical differences reported in the first part of the paper.

Keywords: Inflation dynamics; persistence; volatility; DSGE modeling; simulations (search for similar items in EconPapers)
JEL-codes: C22 E31 F41 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015-09
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-dge, nep-mac and nep-mon
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Published in Journal of International Money and Finance, Volume 79, December 2017, Pages 115-135.

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