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Monetary Policy in a Small Open Economy with Marshallian Preferences *
Author(s) -
ANGYRIDIS CONSTANTINE,
MANSOORIAN ARMAN
Publication year - 2009
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.2008.00526.x
Subject(s) - economics , small open economy , inflation (cosmology) , preference , open economy , welfare , inflation rate , monetary policy , monetary economics , microeconomics , macroeconomics , market economy , exchange rate , physics , theoretical physics
We study the effects of inflation for a small open economy when the representative agent has Marshallian preferences, with which the rate of time preference is a decreasing function of savings. An increase in the inflation rate reduces the permanent income of the representative agent, which, with Marshallian preferences, also reduces the rate of time preference. Hence, savings falls and the country runs a current account deficit. The numerical evaluations of the model suggest that inflation has significant effects on welfare in the steady state.