Scandinavian Working Papers in Economics
Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)
No 407: The cost of disinflation in a small open economy vis-à-vis a closed economy
Oleksandr Faryna, Magnus Jonsson () and Nadiia Shapovalenko
Additional contact information
Oleksandr Faryna: National Bank of Ukraine and National University of Kyiv-Mohyla Academy
Magnus Jonsson: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Nadiia Shapovalenko: National Bank of Ukraine
Abstract: We use a standard new Keynesian model to evaluate the cost of disinflation – measured by the sacrifice ratio, the central bank’s loss function, and the welfare cost – in a small open economy vis-à-vis a closed economy. Disinflation is either more costly or less beneficial in the small open economy, but the results vary quantitatively depending on the measure and the economic environment. Optimised simple monetary policy rules imply that the relative weight on inflation stabilisation should be lower in the small open economy if the central bank minimises the loss function, but higher if it maximises welfare.
Keywords: Disinflation; sacrifice ratio; central bank’s loss function; welfare cost; small open economy; new Keynesian model; optimised rules; imperfect credibility
Language: English
38 pages, November 1, 2021
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