International spillover effects and monetary policy activism

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 13 November 2009

Working Paper No. 377
By Anna Lipinska, Morten Spange and Misa Tanaka

This paper examines how the preferences of a large economy’s central bank affect the trade-off between output and inflation volatility faced by the central bank of a small open economy by analysing the impact of a global cost-push shock. We demonstrate that under the assumption of producer currency pricing, the trade-off faced by the small open economy is likely to worsen as the foreign central bank becomes more focused on output stabilisation relative to inflation stabilisation; but the opposite is true in the case of local currency pricing.

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