Inflation Inertia and Credible Disinflation - the Open Economy Case

33 Pages Posted: 6 Oct 2005  

Guillermo A. Calvo

Columbia University - School of International & Public Affairs (SIPA); National Bureau of Economic Research (NBER)

Oya Celasun

International Monetary Fund (IMF) - Research Department

Michael Kumhof

International Monetary Fund (IMF)

Date Written: March 2003

Abstract

This paper develops a model of inflation inertia based on optimizing forward looking staggered price setting in a small open economy. Unlike in current models 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. There is a welfare trade-off between these output losses and the gains from smaller inflationary distortions. For reasonable parameter values inflation stabilization improves welfare. The optimal steady state is reached at the Friedman rule. Technical appendices are available at www.nber.org/data-appendix/w9557/ inert-techapp.pdf

Suggested Citation

Calvo, Guillermo A. and Celasun, Oya and Kumhof, Michael, Inflation Inertia and Credible Disinflation - the Open Economy Case (March 2003). NBER Working Paper No. w9557. Available at SSRN: https://ssrn.com/abstract=387565

Guillermo A. Calvo (Contact Author)

Columbia University - School of International & Public Affairs (SIPA) ( email )

420 West 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Oya Celasun

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Michael Kumhof

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Paper statistics

Downloads
60
Rank
295,368
Abstract Views
1,552