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State-Dependent Nominal Rigidities & Disinflation Programs in Small Open Economies

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  • Kolver Hernandez

    (Department of Economics,University of Delaware)

Abstract

Experiences of high-inflation economies suggest that exchange rate-based (ERB) and money-based (MB) disinflations induce sharply different dynamics in consumption and GDP. I study the role of nominal rigidities to explain such dynamics. I build on Calvo pricing to introduce elements of state-dependent into an otherwise standard small open economy. This new feature delivers state-dependent nominal rigidities (SDNR). Nonlinear simulations show that the model with SDNR generates a dynamic behavior consistent with both ERB and MB disinflations; however the model’s special case with constant nominal rigidities is not successful rationalizing ERB disinflations.

Suggested Citation

  • Kolver Hernandez, 2006. "State-Dependent Nominal Rigidities & Disinflation Programs in Small Open Economies," Working Papers 06-13, University of Delaware, Department of Economics.
    • Handle: RePEc:dlw:wpaper:06-13
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    Cited by:

    1. Saborowski, Christian, 2010. "Inflation targeting as a means of achieving disinflation," Journal of Economic Dynamics and Control, Elsevier, vol. 34(12), pages 2510-2532, December.
    2. Landry, Anthony, 2009. "Expectations and exchange rate dynamics: A state-dependent pricing approach," Journal of International Economics, Elsevier, vol. 78(1), pages 60-71, June.

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    More about this item

    Keywords

    Nominal rigidities; disinflations; state-dependent pricing; exchange-rate based stablizations;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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