Presentation of the paper
Inflation Persistence in an Open Economy
City University, London
This paper lays out a small open economy version of model where inflation is persistent. On the supply side, there are two types of different price setters, from which one type sets its prices optimally according to Calvo pricing mechanism. The other type sets its prices accordingly to a rule of thumb. This mechanism results in a hybrid Phillips curve with forward and backward looking component. We study different monetary policy rules in this framework, the PPI-based Taylor rule, CPI- based Taylor rule and growth in money supply and show that it is important to consider the aspects of inflation inertia as well as open economy parameters within this framework.
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