Authors: Oleksandr Faryna, Magnus Jonsson, Nadiia Shapovalenko
Abstract: This paper examines the cost of disinflation as measured by the sacrifice ratio and the central bank loss function in closed and small open economies. We show that the sacrifice ratio is slightly higher in the small open economy if monetary policy in both economies follow identical Taylor rules. However, if monetary policies follow optimized simple rules the sacrifice ratio becomes slightly lower in the small open economy. The cost in terms of the central bank loss is higher in the small open economy irrespective of monetary policies. Imperfect central bank credibility changes the results quantitatively, but not qualitatively. Finally, in both economies, the optimal implementation horizon is approximately two quarters in advance and approximately four quarters if central bank credibility is imperfect.
Cite as: Faryna, O., Jonsson, M., Shapovalenko, N. (2019). Disinflation in closed and small open economies. NBU Working Papers, 1/201. Kyiv: National Bank of Ukraine. Retrieved from https://bank.gov.ua/admin_uploads/article/wp_nbu_2019-1_Faryna_eng.pdf