Abstract

TELLEZ-LEON, Isela Elizabeth; VENEGAS-MARTINEZ, Francisco  and  RODRIGUEZ-NAVA, Abigail. Inflation Volatility and Growth in a Stochastic Small Open Economy: A Mixed Jump-Diffusion Approach. Econ: teor. práct [online]. 2011, n.35, pp.131-156. ISSN 2448-7481.

The aim of this paper is to examine how inflation volatility affects economic growth in a small open economy. To reach this goal, a stochastic macroeconomic model with a financial sector and incomplete financial markets (due to the inclusion of jumps) is developed. It is assumed that the general price level is driven by mixed diffusion-jump process, that is, a Brownian motion governs inflation and a Poisson process guides unexpected and sudden jumps in the price index. The economic growth rate is endogenously determined, in the equilibrium, as a function of parameters of the inflation process.

Keywords : inflation; growth; stochastic models.

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