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Disinflation Dynamics in an Open Economy General Equilibrium Model

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  • Özge Senay

Abstract

This paper studies money based and exchange rate based disinflation in an open economy model with explicit microfoundations. For benchmark parameter values, it is found that a money slowdown leads to a recession in the short run whereas exchange rate based disinflation leads to very rapid adjustment with minimal real effects. This corresponds to the results of directly postulated models. Overshooting of the exchange rate in response to a money slowdown, however, only occurs when there is pricing-to-market behavior. It is found that by varying certain key parameter values such as the intertemporal rate of discount and the degree of price inertia, exchange rate based stabilization can produce substantial real effects. This contrasts with the results of directly postulated models and is related to issues highlighted by the introduction of microfoundations.

Suggested Citation

  • Özge Senay, "undated". "Disinflation Dynamics in an Open Economy General Equilibrium Model," Discussion Papers 98/15, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:98/15
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    More about this item

    Keywords

    disinflation; staggered prices; persistence; dynamic general equilibrium; pricing-to-market;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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