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International Spillover Effects and Monetary Policy Activism

Authors


  • We gratefully acknowledge comments and suggestions by the Editor and two anonymous referees, Kosuke Aoki, Gianluca Benigno, Bianca De Paoli, and Tony Yates. We also thank seminar participants at the Bank of England, Danmarks Nationalbank, the 2009 Conference of the Royal Economic Society in Surrey, and 16th International Conference on Computing in Economics and Finance in London. The views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of England or Danmarks Nationalbank.

Abstract

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 analyzing 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 stabilization relative to inflation stabilization; but the opposite is true in the case of local currency pricing.

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