Journal article
Exchange Rate Pass Through, Cost Channel to Monetary Policy Transmission, Adaptive Learning, and the Price Puzzle
International Review of Economics and Finance, Vol.48, pp.69-82
2017
Abstract
Using a New Keynesian open economy model, where the supply side effects of the exchange rate pass through as well as the cost channel of monetary policy transmission are taken into account, this paper evaluates the possibility of the price puzzle, which refers to anomalous behavior of inflation to a monetary shock. Unlike the existing studies, we consider the possibility of the price puzzle when agent expectations are based on adaptive learning and three monetary policy alternatives (the optimal monetary policy, money growth targeting, and a Calvo-type policy rule) are available to the central bank. Furthermore, we use two alternative measures of inflation. Calibration of our medium scale model, using plausible parameter values, reveals that irrespective of how the inflation rate is measured and the policy rule used by the central bank, the puzzle fades away when a sufficiently strong exchange rate pass through is present in the economy. We also find that a decrease in inflation is associated with a cost to the society in the form of lower aggregate output but this loss is minimum when the central bank uses the optimal monetary policy.
Details
- Title
- Exchange Rate Pass Through, Cost Channel to Monetary Policy Transmission, Adaptive Learning, and the Price Puzzle
- Authors
- Syed Zahid Ali (Author) - Lahore University of Management Sciences, PakistanSajid Anwar (Author) - University of the Sunshine Coast - Faculty of Arts, Business and Law
- Publication details
- International Review of Economics and Finance, Vol.48, pp.69-82
- Publisher
- Elsevier BV
- Date published
- 2017
- DOI
- 10.1016/j.iref.2016.11.010
- ISSN
- 1059-0560
- Copyright note
- Copyright © 2017. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
- Organisation Unit
- School of Business and Creative Industries; Indigenous and Transcultural Research Centre; University of the Sunshine Coast, Queensland; USC Business School - Legacy
- Language
- English
- Record Identifier
- 99450424102621
- Output Type
- Journal article
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