Nominal Exchange Rate Anchoring Under Inflation Inertia

This paper develops a theory of inflation inertia based on forward looking staggered price setting in the nontradable goods sector of a small open economy. Unlike current theories of sticky prices, transitions to a lower steady state inflation rate take time even if they are fully credible, and they...

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Main Author: Calvo, Guillermo
Other Authors: Celasun, Oya, Kumhof, Michael
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2002, 2002
Series:IMF Working Papers; Working Paper
Subjects:
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
Summary:This paper develops a theory of inflation inertia based on forward looking staggered price setting in the nontradable goods sector of a small open economy. Unlike current theories 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 in nontradables There is a welfare trade-off between these output losses and the gains from smaller inflationary distortions. Gains exceed losses for most calibrations. The optimal steady state is the Friedman rule
Physical Description:36 p.
ISBN:9781451844924
1451844921