Inflation persistence and exchange rate regime: implications for dynamic adjustment to shocks in a small open economy
The paper examines implications of ination persistence for business cycle dynamics following terms of trade shock in a small oil producing economy, under ination targeting and exchange rate targeting regimes. It is shown that due to the 'Walters critique' effect, the country's adjustm...
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| Format: | Working paper |
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University of Oxford
2011
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| _version_ | 1797105747722502144 |
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| author | Kuralbayeva, K |
| author_facet | Kuralbayeva, K |
| author_sort | Kuralbayeva, K |
| collection | OXFORD |
| description | The paper examines implications of ination persistence for business cycle dynamics following terms of trade shock in a small oil producing economy, under ination targeting and exchange rate targeting regimes. It is shown that due to the 'Walters critique' effect, the country's adjustment paths are slow and cyclical if there is a signicant backward-looking element in the inflation dynamics and the exchange rate isfixed. It is also shown that such cyclical adjustment paths are moderated if there is a high proportion of forward-looking price setters in the economy, so that when the Phillips curve becomes completely forward-looking cyclicality in adjustment paths disappears and the response of the real exchange rate becomes hump-shaped. In contrast, with an independent monetary policy, irrespective of the degree of inflation persistence, flexible exchange rate allows to escape severe cycles, which results in a smooth response of the real exchange rate. |
| first_indexed | 2024-03-07T06:51:47Z |
| format | Working paper |
| id | oxford-uuid:fccebe46-6b9c-4662-99bd-6d9a6e553d60 |
| institution | University of Oxford |
| last_indexed | 2024-03-07T06:51:47Z |
| publishDate | 2011 |
| publisher | University of Oxford |
| record_format | dspace |
| spelling | oxford-uuid:fccebe46-6b9c-4662-99bd-6d9a6e553d602022-03-27T13:23:42ZInflation persistence and exchange rate regime: implications for dynamic adjustment to shocks in a small open economyWorking paperhttp://purl.org/coar/resource_type/c_8042uuid:fccebe46-6b9c-4662-99bd-6d9a6e553d60Bulk import via SwordSymplectic ElementsUniversity of Oxford2011Kuralbayeva, KThe paper examines implications of ination persistence for business cycle dynamics following terms of trade shock in a small oil producing economy, under ination targeting and exchange rate targeting regimes. It is shown that due to the 'Walters critique' effect, the country's adjustment paths are slow and cyclical if there is a signicant backward-looking element in the inflation dynamics and the exchange rate isfixed. It is also shown that such cyclical adjustment paths are moderated if there is a high proportion of forward-looking price setters in the economy, so that when the Phillips curve becomes completely forward-looking cyclicality in adjustment paths disappears and the response of the real exchange rate becomes hump-shaped. In contrast, with an independent monetary policy, irrespective of the degree of inflation persistence, flexible exchange rate allows to escape severe cycles, which results in a smooth response of the real exchange rate. |
| spellingShingle | Kuralbayeva, K Inflation persistence and exchange rate regime: implications for dynamic adjustment to shocks in a small open economy |
| title | Inflation persistence and exchange rate regime: implications for dynamic adjustment to shocks in a small open economy |
| title_full | Inflation persistence and exchange rate regime: implications for dynamic adjustment to shocks in a small open economy |
| title_fullStr | Inflation persistence and exchange rate regime: implications for dynamic adjustment to shocks in a small open economy |
| title_full_unstemmed | Inflation persistence and exchange rate regime: implications for dynamic adjustment to shocks in a small open economy |
| title_short | Inflation persistence and exchange rate regime: implications for dynamic adjustment to shocks in a small open economy |
| title_sort | inflation persistence and exchange rate regime implications for dynamic adjustment to shocks in a small open economy |
| work_keys_str_mv | AT kuralbayevak inflationpersistenceandexchangerateregimeimplicationsfordynamicadjustmenttoshocksinasmallopeneconomy |