Nominal Exchange Rate Shocks and Inflation in an Open Economy: Towards a Structuralist Inflation Targeting Agenda

55 Pages Posted: 8 Jun 2017

See all articles by Eduardo Bastian

Eduardo Bastian

Universidade Federal do Rio de Janeiro (UFRJ)

Mark Setterfield

New School for Social Research

Date Written: May 2017

Abstract

This paper develops a model of inflation in an open economy. The model permits analysis of the susceptibility of open economies to permanent inflationary consequences arising from transitory foreign exchange shocks. Sources of structural vulnerability to such events are identified, and means of addressing these structural vulnerabilities are discussed. Ultimately, the paper arrives at a “structuralist inflation targeting agenda”. Based on a proper conception of inflation dynamics, this involves “getting inflation targeting right” rather than either accepting mainstream inflation targeting prescriptions or simply neglecting inflation altogether.

Keywords: inflation, strato-inflation, nominal exchange rate shocks, conflicting claims, hysteresis, capital controls, industrial policy

JEL Classification: E12, E31, F31, F41

Suggested Citation

Bastian, Eduardo and Setterfield, Mark, Nominal Exchange Rate Shocks and Inflation in an Open Economy: Towards a Structuralist Inflation Targeting Agenda (May 2017). Available at SSRN: https://ssrn.com/abstract=2982304 or http://dx.doi.org/10.2139/ssrn.2982304

Eduardo Bastian

Universidade Federal do Rio de Janeiro (UFRJ) ( email )

Av; Pasteur, 250
terreo - Bairro Maracana
Rio de Janeiro, Rio de Janeiro 23890000
Brazil

Mark Setterfield (Contact Author)

New School for Social Research ( email )

6 East 16th Street
New York, NY 10003
United States

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