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International
Transmission of Anticipated Inflation
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Abstract This paper studies the international transmission of anticipated inflation. A two-country, two-good, two-currency, cash-in-advance model is used to examine analytically and numerically the consequences of changes in a country's inflation rate. Domestic monetary policy influences real activity at home through an inflation-tax channel. These real effects are transmitted to the foreign country via fluctuations in the real exchange rate. Under a flexible nominal exchange rate, inflation is a beggar-thy-neighbor policy. Under a fixed nominal exchange rate, each country suffers a welfare loss when one country inflates. The quantitative results are fairly insensitive to variations in the cash-credit mix used to finance investment expenditures. Jill A. Holman is an economist at the Federal Reserve Bank of Kansas City. Felix K. Rioja is an assistant professor of economics in the School of Policy Studies at Georgia State University. The views expressed in this paper are not necessarily those of the Federal Reserve Bank of Kansas City or the Federal Reserve System.Holman e-mail: jill.a.holman@kc.frb.org
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