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Quantifying the Second-Round Effects of Supply-Side Shocks on Inflation

Author

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  • Tibor Hlédik
Abstract
This paper uses a small-scale dynamic rational expectations model based on an openeconomy version of Fuhrer-Moore-type staggered wage setting to quantify the secondround effects of selected supply-side shocks and of shocks to the nominal exchange rate on wages and subsequently on inflation. In order to analyse the desired reaction of the central bank to these shocks, optimal time-consistent policy rules are derived within the presented New-Keynesian framework. The conclusions presented in the paper suggest that the second-round effects of shocks to import prices and the nominal exchange rate on inflation should not be ignored in practical policy-making.

Suggested Citation

  • Tibor Hlédik, 2004. "Quantifying the Second-Round Effects of Supply-Side Shocks on Inflation," Prague Economic Papers, Prague University of Economics and Business, vol. 2004(2), pages 121-141.
    • Handle: RePEc:prg:jnlpep:v:2004:y:2004:i:2:id:235:p:121-141
    DOI: 10.18267/j.pep.235
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    References listed on IDEAS

    as
    1. Buiter,Willem H. & Marston,Richard C., 1986. "International Economic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521337809, September.
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    3. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    4. Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 7-30, January.
    5. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 127-159.
    6. Mervyn A. King, 1996. "How should central banks reduce inflation? - Conceptual issues," Economic Review, Federal Reserve Bank of Kansas City, vol. 81(Q IV), pages 25-52.
    7. Fuhrer, Jeffrey C., 2010. "Inflation Persistence," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 9, pages 423-486, Elsevier.
    8. Blake, Andrew P., 2000. "Optimality and Taylor Rules," National Institute Economic Review, National Institute of Economic and Social Research, vol. 174, pages 80-91, October.
    9. Soderlind, Paul, 2001. "Monetary policy and the Fisher effect," Journal of Policy Modeling, Elsevier, vol. 23(5), pages 491-495, July.
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    11. Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters, in: Monetary Policy Rules, pages 157-202, National Bureau of Economic Research, Inc.
    12. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
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    14. Batini, Nicoletta & Yates, Anthony, 2003. "Hybrid Inflation and Price-Level Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 283-300, June.
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    Cited by:

    1. Jaroslava Durčáková, 2011. "Foreign Exchange Rate Regimes and Foreign Exchange Markets in Transitive Economies," Prague Economic Papers, Prague University of Economics and Business, vol. 2011(4), pages 309-328.

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    More about this item

    Keywords

    monetary policy; inflation targeting; optimal policy rules;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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