Hostname: page-component-848d4c4894-m9kch Total loading time: 0 Render date: 2024-06-05T02:06:55.326Z Has data issue: false hasContentIssue false
  • English
  • Français

INFLATION TARGETING, PATTERN OF TRADE, AND ECONOMIC DYNAMICS

Published online by Cambridge University Press:  23 May 2018

Juin-jen Chang ,
Wen-ya Chang ,
Hsueh-fang Tsai  and
Ping Wang
Juin-jen Chang
Affiliation:
Academia Sinica
Wen-ya Chang
Affiliation:
Fu-Jen Catholic University
Hsueh-fang Tsai
Affiliation:
Fu-Jen Catholic University
Ping Wang*
Affiliation:
Washington University in St. Louis, Federal Reserve Bank of St. Louis, and NBER
*
Address correspondence to: Ping Wang, Department of Economics, Washington University in St. Louis, Campus Box 1208, One Brookings Drive, St. Louis, MO 63130, USA; e-mail: pingwang@wustl.edu.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper develops an analytically tractable, two-country, two-traded-good dynamic general-equilibrium model of money to examine the long-run and short-run effects of a temporary change in the domestic inflation target on the trade pattern, the terms of trade, the foreign exchange rate, and the capital accumulation of each country and of the world economy. We find that such a temporary monetary innovation can generate permanent effects on the world distribution of capital and the pattern of trade, resulting in nonneutrality in an otherwise money-neutral cash-in-advance setting. This change also leads to very rich transitional dynamics that we fully characterize analytically. In particular, endogenous responses in transition can be monotone or nonmonotone and can exhibit over-shooting. Our analytic findings and quantitative results help explain some noticeable changes in the capital accumulation, output, and bilateral trade of several countries adopting inflation targeting. Since the permanent effects of a temporary change in the domestic inflation target on the pattern of international trade and the performance of the macroeconomy are driven by a new channel through the world distribution of capital, we add new insights to the literature.

Keywords

Inflation TargetingDynamic Pattern of TradeWorld Distribution of Capital
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 7 , October 2019 , pp. 2748 - 2786
Copyright
Copyright © Cambridge University Press 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Been-Lon Chen, Mario Crucini, Ching-Chong Lai, Chang-Ching Lin, Hsieh-Yu Lin, Juan Pantano, B. Ravikumar, Ray Riezman, Steve Turnovsky, and Chong K. Yip for valuable comments and suggestions, three anonymous referees, as well as conference participants at the Econometric Society Summer Meetings, the Midwest Economic Theory and International Trade Meetings, the Midwest Macroeconomic Conference, the Society for the Advancement of Economic Theory Conference, and the Society for Economic Dynamics Meetings. Part of this paper was completed while the fourth author was visiting Academia Sinica and Fu-Jen Catholic University. We are saddened to acknowledge that the second author passed away unexpectedly in the process of this collaboration. The usual disclaimer applies.

References

REFERENCES

Agénor, P. R. and Montiel, P. J. (1996) Development Macroeconomics. Princeton, NJ: Princeton University Press.Google Scholar
Batini, N. and Laxton, D. (2007) Under what conditions can inflation targeting be adopted? The experience of emerging markets. In Mishkin, F. and Schmidt-Hebbel, K. (eds.), Monetary Policy under Inflation Targeting, pp. 1–38. Santiago: Central Bank of Chile.Google Scholar
Baxa, J., Horvath, R., and Vasicek, B. (2014) How does monetary policy change? Evidence on inflation targeting countries. Macroeconomic Dynamics 18, 593–630.10.1017/S1365100512000545Google Scholar
Bernanke, B. S. and Mishkin, F. S. (1997) Inflation targeting: A new framework for monetary policy? Journal of Economic Perspectives 11, 97–116.10.1257/jep.11.2.97Google Scholar
Bernanke, B. S. and Woodford, M. (1997) Inflation forecasts and monetary policy. Journal of Money, Credit and Banking 29, 653–684.10.2307/2953656Google Scholar
Boardman, A. E., Moore, M. A., Vining, A. R., and Civita, P. D. (2009) Proposed Social Discount Rate(s) for Canada Based on Future Growth. Working paper series 039, Policy Research Initiative, Canada.Google Scholar
Bond, E. W., Trask, K., and Wang, P. (2003) Factor accumulation and trade: Dynamic comparative advantage with endogenous physical and human capital. International Economic Review 44, 1041–1060.10.1111/1468-2354.t01-1-00099Google Scholar
Bond, E. W., Wang, P., and Yip, C. K. (1996) A general two-sector model of endogenous growth with human and physical capital: Balanced growth and transitional dynamics. Journal of Economic Theory 68, 149–173.10.1006/jeth.1996.0008Google Scholar
Brito, R. and Bystedt, B. (2010) Inflation targeting and emerging economies: Panel evidence. Journal of Development Economics 91, 198–210.10.1016/j.jdeveco.2009.09.010Google Scholar
Brown, J. R. and Petersen, B. C. (2009) Why has the investment-cash flow sensitivity declined so sharply? Rising R&D and equity market developments. Journal of Banking & Finance 33, 971–984.10.1016/j.jbankfin.2008.10.009Google Scholar
Calvo, G. (1987) Balance of payments crisis in a cash-in-advance economy. Journal of Money, Credit and Banking 19, 19–32.10.2307/1992242Google Scholar
Chang, J., Chang, W., Lai, C., and Wang, P. (2007) Equilibrium dynamics in an endogenous growth model of money and banking. Journal of Money, Credit and Banking 39, 1683–1710.10.1111/j.1538-4616.2007.00083.xGoogle Scholar
Chen, Z. (1992) Long-run equilibria in a dynamic Heckscher-Ohlin model. Canadian Journal of Economics 23, 923–943.10.2307/135772Google Scholar
Christiano, L. and Eichenbaum, M. (1995) Liquidity effects, monetary policy and the business cycle. Journal of Money, Credit and Banking 27, 1113–1136.10.2307/2077793Google Scholar
De Fiore, F. and Liu, Z. (2005) Does trade openness matter for aggregate instability? Journal of Economic Dynamics and Control 29, 1165–1192.10.1016/j.jedc.2004.06.001Google Scholar
DICE Database (2017) Inflation targeting frameworks, 2015. Ifo Institute, Munich, available at https://www.cesifo-group.de/de/ifoHome/facts/DICE/Banking-and-Financial-Markets/Banking/Monetary-Policy.htmlGoogle Scholar
Doi, J., Nishimura, K., and Shimomura, K. (2007) A two-country dynamic model of international trade and endogenous growth: Multiple balanced growth paths and stability. Journal of Mathematical Economics 43, 390–419.10.1016/j.jmateco.2006.05.005Google Scholar
Dotsey, M. and Sarte, P. D. (2000) Inflation uncertainty and growth in a cash-in-advance economy. Journal of Monetary Economics 45, 631–655.10.1016/S0304-3932(00)00005-2Google Scholar
Eaton, J. and Kortum, S. (2002) Technology, geography, and trade. Econometrica 70, 1741–1779.10.1111/1468-0262.00352Google Scholar
Fortin, P. (1996) The Great Canadian Slump. Canadian Journal of Economics 29, 761–787.10.2307/136214Google Scholar
Froot, K. A. and Stein, J. C. (1991) Exchange rates and foreign direct investment: An imperfect capital markets approach. Quarterly Journal of Economics 106, 1191–1217.10.2307/2937961Google Scholar
Huang, K. X. D., Meng, Q., and Xue, J. (2009) Is forward-looking inflation targeting destabilizing? The role of policy's response to current output under endogenous investment. Journal of Economic Dynamics and Control 33, 409–430.10.1016/j.jedc.2008.05.009Google Scholar
Lin, S. and Ye, H. (2009) Does inflation targeting make a difference in developing countries? Journal of Development Economics 89, 118–123.10.1016/j.jdeveco.2008.04.006Google Scholar
Lucas, R. E. Jr. (1980) Equilibrium in a pure currency Economy. Economic Inquiry 18, 203–220.10.1111/j.1465-7295.1980.tb00570.xGoogle Scholar
Lucas, R. E. Jr. (2000) Inflation and welfare. Econometrica 68, 247–274.10.1111/1468-0262.00109Google Scholar
Lucas, R. E. Jr. and Stokey, N. (1987) Money and interest in a cash in advance economy. Econometrica 55, 491–513.10.2307/1913597Google Scholar
Mansoorian, A. and Mohsin, M. (2006) On the employment, investment, and current account effects of inflation. Journal of International Economics 70, 296–313.10.1016/j.jinteco.2005.12.003Google Scholar
Melitz, M. J. (2003) The impact of trade on intra-industry reallocations and aggregate industry productivity.. Econometrica 71, 1695–1725.10.1111/1468-0262.00467Google Scholar
Mishkin, F. S. and Schmidt-Hebbel, K. (2001) One Decade of Inflation Targeting in the World: What Do We Know and What Do We Need To Know? NBER working paper series no. 8397.Google Scholar
Mundell, R. A. (1968) International Economics. New York: Macmillan.Google Scholar
Nishimura, K. and Yano, M. (1993) Interlinkage in the endogenous real business Cycles of international economies. Economic Theory 3, 151–168.10.1007/BF01213698Google Scholar
Nishimura, K. and Shimomura, K. (2002) Trade and indeterminacy in a dynamic general equilibrium model. Journal of Economic Theory 105, 244–260.10.1006/jeth.2001.2892Google Scholar
Obstfeld, M. (1983) Intertemporal price speculation and the optimal current-account deficit. Journal of International Money and Finance 2, 135–145.10.1016/0261-5606(83)90011-6Google Scholar
Obstfeld, M. and Rogoff, K. (2000) New directions for stochastic open economy models. Journal of International Economics 50, 117–153.10.1016/S0022-1996(99)00034-3Google Scholar
Oniki, H. and Uzawa, H. (1965) Patterns of trade and investment in a dynamic model of international trade. Review of Economic Studies 32, 15–38.10.2307/2296328Google Scholar
Rose, A. K. (2007) A stable international monetary system emerges: Inflation targeting is Bretton Woods, reversed. Journal of International Money and Finance 26, 663–681.10.1016/j.jimonfin.2007.04.004Google Scholar
Sen, P. and Turnovsky, S. (1989) Deterioration of the terms of trade and capital accumulation: A re-examination of the Laursen-Metzler effect. Journal of International Economics 26, 227–250.10.1016/0022-1996(89)90002-0Google Scholar
Stockman, A. C. (1981) Anticipated inflation and the capital stock in a cash in advance economy. Journal of Monetary Economics 8, 387–93.10.1016/0304-3932(81)90018-0Google Scholar
Stockman, A. C. (1985) Effects of inflation in the pattern of trade. Canadian Journal of Economics 18, 587–601.10.2307/135021Google Scholar
Stulz, R. M. (1987) On the effects of barriers to international investment. Journal of Finance 36, 923–934.10.1111/j.1540-6261.1981.tb04893.xGoogle Scholar
Svensson, L. E. O. (1999) Inflation targeting as a monetary policy rule. Journal of Monetary Economics 43, 607–654.10.1016/S0304-3932(99)00007-0Google Scholar
Svensson, L. E. O. (2000) Open-economy inflation targeting. Journal of International Economics 50, 155–183.10.1016/S0022-1996(98)00078-6Google Scholar
Wang, P. and Yip, C. K. (1992) Alternative approaches to money and growth. Journal of Money, Credit, and Banking 24, 553–562.10.2307/1992811Google Scholar
Woodford, M. (1994) Monetary policy and price level determinacy in a cash-in-advance economy. Economic Theory 4, 345–380.10.1007/BF01215377Google Scholar
Supplementary material: PDF

Chang et al. supplementary material

Chang et al. supplementary material 1

Download Chang et al. supplementary material(PDF)
PDF 234.3 KB