The cost of disinflation in a small open economy vis-à-vis a closed economy

Oleksandr Faryna, Magnus Jonsson () and Nadiia Shapovalenko
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Oleksandr Faryna: National Bank of Ukraine and National University of Kyiv-Mohyla Academy
Magnus Jonsson: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Nadiia Shapovalenko: National Bank of Ukraine

No 407, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: We use a standard new Keynesian model to evaluate the cost of disinflation – in terms of the sacrifice ratio, the central bank’s loss, and welfare – in a small open economy compared to a closed economy. We show that the cost of disinflation in terms of the sacrifice ratio and the central bank’s loss is higher in the small open economy, and that the welfare benefit in terms welfare is lower. Lack of credibility is also more costly in terms of the central bank’s loss in the small open economy. In terms of policy implications, optimised simple monetary policy rules imply that the relative weight on inflation stabilisation should be lower in the small open economy if the central bank minimises the loss function, but higher if it maximises welfare.

Keywords: Disinflation; sacrifice ratio; central bank loss; welfare cost; small open economy; New Keynesian model; optimised simple rules; imperfect credibility (search for similar items in EconPapers)
JEL-codes: E31 E50 F41 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2021-11-01, Revised 2025-10-01
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-dge, nep-mac, nep-mon and nep-opm
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