On the Effects of Inflation Shocks in a Small Open Economy

Sushanta Mallick · Mohammed Mohsin

56 citations0/0 files storedAustralian Economic Review

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Monetary Policy and Economic Impact Economic Theory and Policy Market Dynamics and Volatility

Abstract

Abstract The effects of monetary policies remain always an important topic in macroeconomics. In the literature (closed and open economy), there is no theoretical as well as empirical consensus regarding the effects of monetary policies. In this paper we examine the real effects of inflation in an open economy. Australia is a classic example of a small open economy and is known to exercise inflation targeting. Using quarterly data from Australia and employing vector autoregressive (VAR) analysis, we provide evidence that inflation, both in the short and long run, negatively affects durable and non‐durable consumption and investment, and has a positive effect on the current account. Further, we show that consumption of durable goods is more sensitive than the consumption of non‐durables during the initial periods following inflationary shocks.

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References

1998Generalized impulse response analysis in linear multivariate models 1996Impulse response analysis in nonlinear multivariate models 1999The Science of Monetary Policy: A New Keynesian Perspective 1965Money and Economic Growth 1981Anticipated inflation and the capital stock in a cash in-advance economy 1991Homework in Macroeconomics: Household Production and Aggregate Fluctuations 1996Frontiers of business cycle research 1985Money and Interest in a Cash-in-Advance Economy

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