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Disinflation in Closed and Small Open Economies

Oleksandr Faryna (), Magnus Jonsson () and Nadiia Shapovalenko ()
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Oleksandr Faryna: National Bank of Ukraine
Magnus Jonsson: Sveriges Riksbank
Nadiia Shapovalenko: National Bank of Ukraine

No 01/2019, Working Papers from National Bank of Ukraine

Abstract: This paper examines the cost of disinflation as measured by the sacrifice ratio and the central bank loss function in closed and small open economies. We show that the sacrifice ratio is slightly higher in the small open economy if monetary policy in both economies follow identical Taylor rules. However, if monetary policies follow optimized simple rules the sacrifice ratio becomes slightly lower in the small open economy. The cost in terms of the central bank loss is higher in the small open economy irrespective of monetary policies. Imperfect central bank credibility changes the results quantitatively, but not qualitatively. Finally, in both economies, the optimal implementation horizon is approximately two quarters in advance and approximately four quarters if central bank credibility is imperfect.

Keywords: disinflation; small open economy; new Keynesian model; imperfect credibility; implementation (search for similar items in EconPapers)
JEL-codes: E31 E5 F41 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2019-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon, nep-opm and nep-ore
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