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Optimal long-run inflation rate in an open economy

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  • Ishise, Hirokazu

Abstract

I analyze the long-run optimal inflation rate in the sticky price model with trend inflation and a two-country, two-good Ricardian trade structure. As in the closed-economy model, price stickiness effectively reduces an industry’s productivity under trend inflation. Contrary to the standard closed-economy models in which the optimal inflation rate is approximately zero, the model implies that the optimal rate is positive under certain conditions. Welfare gains come from manipulations of the terms of trade, and are hence associated with the loss of the trade partner. If the partner counter-acts, the allocation can be worse than what would occur under autarky.

Suggested Citation

  • Ishise, Hirokazu, 2022. "Optimal long-run inflation rate in an open economy," European Economic Review, Elsevier, vol. 148(C).
    • Handle: RePEc:eee:eecrev:v:148:y:2022:i:c:s0014292122001301
    DOI: 10.1016/j.euroecorev.2022.104223
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    More about this item

    Keywords

    Sticky price; Optimal inflation rate; Trend inflation; Immiserizing growth; Terms of trade; Ricardian trade model;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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