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Please use this identifier to cite or link to this item: http://hdl.handle.net/2108/313

Title: Inflation persistence: implications for a design of monetary policy in a small open economy subject to external shocks
Authors: Kuralbayeva, Karlygash
Keywords: infl‡ation inertia
monetary policy
exchange rates
Phillips curve
small open economy
Issue Date: Mar-2007
Publisher: CEIS
Series/Report no.: CEIS Tor Vergata Research Paper; 95
Abstract: We analyze implications of inflation persistence for business cycle dynamics following terms of trade and risk-premium shocks in a small open economy, under fixed and flexible exchange rate regimes. We show that the country's adjustment paths are slow and cyclical if there is a significant backward-looking element in the inflation dynamics and the exchange rate is fixed. We also show that such cyclical adjustment paths are moderated if there is a high proportion of forward-looking price setters. In contrast, with an independent monetary policy, flexible exchange rate allows to escape severe cycles, supporting the conventional wisdom about the insulation role of flexible exchange rates.
URI: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962665
http://hdl.handle.net/2108/313
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