Disinflation in Closed and Small Open Economies
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Date
2019
Authors
Faryna, Oleksandr
Jonsson, Magnus
Shapovalenko, Nadiia
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Abstract
This paper examines the cost of disinflation as measured by the sacrifice ratio and the central bank
loss function in closed and small open economies. We show that the sacrifice ratio is slightly higher in
the small open economy if monetary policy in both economies follow identical Taylor rules. However,
if monetary policiesfollow optimized simple rulesthe sacrifice ratio becomes slightly lower in the small
open economy. The cost in terms of the central bank loss is higher in the small open economy
irrespective of monetary policies. Imperfect central bank credibility changes the results quantitatively,
but not qualitatively. Finally, in both economies, the optimal implementation horizon is approximately
two quarters in advance and approximately four quarters if central bank credibility is imperfect.
Description
Keywords
Disinflation, small open economy, new Keynesian model, imperfect credibility, implementation, working papers
Citation
Faryna O. Disinflation in Closed and Small Open Economies : [working papers] / O. Faryna, M. Jonsson, N. Shapovalenko ; National Bank of Ukraine - Kyiv : [National Bank of Ukraine], 2019. - 31 p.