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On the Effects of Inflation Shocks in a Small Open Economy
Author(s) -
Mallick Sushanta K.,
Mohsin Mohammed
Publication year - 2007
Publication title -
australian economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.308
H-Index - 29
eISSN - 1467-8462
pISSN - 0004-9018
DOI - 10.1111/j.1467-8462.2007.00450.x
Subject(s) - economics , inflation (cosmology) , open economy , small open economy , consumption (sociology) , monetary economics , monetary policy , macroeconomics , durable good , investment (military) , autoregressive model , inflation targeting , keynesian economics , econometrics , exchange rate , social science , physics , sociology , politics , theoretical physics , law , political science
The effects of monetary policies remain always an important topic in macroeconomics. In the literature (closed and open economy), there is no theoretical as well as empirical consensus regarding the effects of monetary policies. In this paper we examine the real effects of inflation in an open economy. Australia is a classic example of a small open economy and is known to exercise inflation targeting. Using quarterly data from Australia and employing vector autoregressive (VAR) analysis, we provide evidence that inflation, both in the short and long run, negatively affects durable and non‐durable consumption and investment, and has a positive effect on the current account. Further, we show that consumption of durable goods is more sensitive than the consumption of non‐durables during the initial periods following inflationary shocks.