Inflation Dynamics and the Cost Channel: The Small Open Economy Case
Abstract
This paper investigates the cost channel of monetary policy, transmitting its effect on economic activities other than conventional demand side, in a small open economy. The innovations lie in examination of the cost channel in a small open economy with both financial market frictions and exchange rate pass-through on the marginal cost of firm's working capital and inflation dynamics. Utilizing the Canadian and Australian quarterly data, the empirical results from the present value model of the forward-looking Phillips curve show that the larger the degree of exchange rate pass-through is, the more the cost channel is pronounced.
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Citation
Chang, Jui-Chuan Della; Jansen, Dennis W. (2014). Inflation Dynamics and the Cost Channel: The Small Open Economy Case. Private Enterprise Research Center, Texas A&M University; Texas A&M University. Library. Available electronically from https : / /hdl .handle .net /1969 .1 /199393.