Nominal Exchange Rate Anchoring Under Inflation Inertia [electronic resource] / Guillermo Calvo.
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TextSeries: IMF Working Papers; Working Paper ; No. 02/30Publication details: Washington, D.C. : International Monetary Fund, 2002Description: 1 online resource (36 p.)ISBN: 1451844921 :ISSN: 1018-5941Subject(s): Exchange Rate Based Stabilization | Inflation Inertia | Inflation Rate | Monetary Economics | Open Economy Macroeconomics | Relative Price | Chile | MexicoAdditional physical formats: Print Version:: Nominal Exchange Rate Anchoring Under Inflation InertiaOnline resources: IMF e-Library | IMF Book Store Abstract: 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.
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.
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