Working Paper

International transmission of anticipated inflation under alternative exchange-rate regimes


Abstract: This paper studies the international transmission of anticipated inflation. A two-country, two-good, two-currency, cash-in-advance model is used to examine analytically and numerically the consequences of changes in a country's inflation rate. Domestic monetary policy influences real activity at home through an inflation-tax channel. These real effects are transmitted to the foreign country via fluctuations in the real exchange rate. Under a flexible nominal exchange rate, inflation is a beggar-thy-neighbor policy. Under a fixed nominal exchange rate, each country suffers a welfare loss when one country inflates. The quantitative results are fairly insensitive to variations in the cash-credit mix used to finance investment expenditures.

Keywords: Inflation (Finance); Foreign exchange rates;

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Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 1999

Number: 99-04

Pages: 39 pages