Inflation Inertia and Credible Disinflation - The Open Economy Case

Guillermo Calvo, Oya Celasun and Michael Kumhof

No 9557, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops a model of inflation inertia based on optimizing forward looking staggered price setting in a small open economy. Unlike in current models of sticky prices, transitions to a lower steady state inflation rate take time even if they are fully credible, and they are associated with significant output losses. There is a welfare trade-off between these output losses and the gains from smaller inflationary distortions. For reasonable parameter values inflation stabilization improves welfare. The optimal steady state is reached at the Friedman rule. Technical appendices are available at www.nber.org/data-appendix/w9557/ inert-techapp.pdf

JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2003-03
New Economics Papers: this item is included in nep-lam and nep-mon
Note: IFM
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Citations: View citations in EconPapers (16)

Published as Calvo, Guillermo, O. Celasun and M. Kumhof. “Inflation Inertia and Credible Disinflation – The Open Economy Case." Journal of International Economics (2007).

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