Template-Type: ReDIF-Paper 1.0

Author-Name: Konstantin Styrin
Author-Email: StyrinKA@nes.ru
Author-Workplace-Name: Bank of Russia, Russian Federation

Title: Monetary Policy Transmission in a Small Open Economy under Financial and Trade Restrictions

Abstract: This paper studies how the effect of macroeconomic shocks on inflation depends on the severity of
restrictions on international borrowing and imports. Using a calibrated model of a small open
economy, I show that the effect of a change in the terms of trade, while being neutral in the absence
of these restrictions, becomes inflationary in their presence. Inflation pressures emerge due to a
higher interest rate on external borrowing, which is raised in order to pay for imports, and also due
to trade costs, which have a direct effect on the domestic price of imported goods. As a consequence,
monetary policy in the presence of restrictions on financial and trade transactions becomes tighter.

Length: 38 pages
Creation-Date: 2024-12
Revision-Date:
Publication-Status:
File-URL: https://www.cbr.ru/StaticHtml/File/170495/wp_141.pdf
File-Format: Application/pdf
File-Function:
Number: wps141
Classification-JEL: E52, E58, G01, G28
Keywords: monetary policy transmission; financial restrictions; trade restrictions
Handle:RePEc:bkr:wpaper: wps141