Inflation Dynamics in a Dutch Disease Economy

Authors: not saved
Abstract:

Abstract In this paper, the effect of foreign sector macro-variable on inflation dynamics and firms’ pricing behavior has been investigated in the context of a small open economy New Keynesian Phillips Curve. This curve is derived and estimated for a developing oil-exporting economy suffering from Dutch Disease. This version of NKPC is an extension of Leith and Malley’s (2007) small open economy NKPC incorporating oil as a factor of production which is produced in the home country, but its price is determined by the world market. Using GMM technique, this curve has been estimated for standard closed and open economy specifications of the Iranian economy that, according to the empirical evidence, suffers from Dutch Disease. Introducing open economy elements produces three differences in the estimation compared to the closed version: firstly, the degree of price stickiness and the fraction of backward-looking firms decrease; secondly, the degree of substitutability is close to unity; and thirdly, the forward-looking behavior gains ground while the backward-looking behavior becomes less important. Moreover, the significant estimates of the marginal cost coefficient confirm the importance of the real marginal cost in explaining inflation dynamics in the Iranian economy.

Upgrade to premium to download articles

Sign up to access the full text

Already have an account?login

similar resources

inflation dynamics in a dutch disease economy

abstract in this paper, the effect of foreign sector macro-variable on inflation dynamics and firms’ pricing behavior has been investigated in the context of a small open economy new keynesian phillips curve. this curve is derived and estimated for a developing oil-exporting economy suffering from dutch disease. this version of nkpc is an extension of leith and malley’s (2007) small open econom...

full text

The system Dynamics Approach to Money Creation Effect on Inflation in Iran Economy

The performance of banking system in attracting deposits, loan payment and inside money creation may cause the economy facing with potential challenges. Misallocation of resources in banking system and intensifying stagflation, monetary disequilibrium and transmitting its outcomes to real sector, the problems due to differences in maturity date and deviation in allocation of banking credits t...

full text

Dutch Disease, Rentier State, and Resource Curse: A Characteristic Triangle and Ultra Challenge in the Iranian Economy

O wning Natural resources has been beneficial for some Countries, but hurtful for some others. Optimum management of natural resources in the former group has enhanced economic growth, bad governance, however, has led to Dutch Disease in the latter group. Bad governance in Iran has created Dutch Disease, Rentier State, and Resource Curse, DRR as a characteristic triangle. As the Iran...

full text

Inflation and Output in a Cash Constrained Economy

 We examine permanent effects of monetary expansion in an economy where access to credit for financing consumption and investment is limited and consumers and firms are cash-constrained. The main difference between our model with those of Cooley-Hanson (1989) and Walsh (2003) is that investment, in addition to consumption, is subject to a cash-constraint. In this respect, our model is...

full text

Inflation and Cost Push in Iran's Economy

There have been two broad theories of inflation, namely the demand-pull theory of inflation (that is nowadays mainly the monetary theory of inflation) and the cost-push theory of inflation. The mainstream macroeconomics views inflation as a monetary phenomenon in the long run. Iran has experienced double-digit rates of inflation for about four decades. Our main aim is an explanation for the lon...

full text

Inflation Targeting in a Small Open Economy

We would like to thank Philip Lowe, Lars Svensson and David Gruen for helpful suggestions. We are extremely grateful to Luci Ellis for training us in the use of Mathematica 3.0. Any remaining errors are ours. The views expressed are those of the authors and should not be attributed to the Reserve Bank of Australia.

full text

My Resources

Save resource for easier access later

Save to my library Already added to my library

{@ msg_add @}


Journal title

volume 19  issue 3

pages  295- 323

publication date 2015-12-01

By following a journal you will be notified via email when a new issue of this journal is published.

Hosted on Doprax cloud platform doprax.com

copyright © 2015-2023