Working Paper: NBER ID: w30652
Authors: Julien Bengui; Louphou Coulibaly
Abstract: Over the latest monetary policy tightening cycle, capital has been flowing from jurisdictions with the least aggressive hiking profiles to those with the most aggressive ones. This pattern of capital flows is consistent with the predictions of a standard open-economy model with nominal rigidities where cost-push shocks generate an inflationary episode and capital flows freely across countries. Yet, by raising demand for domestic non-tradable goods and services, capital inflows cause unwelcome upward pressure on firms’ costs in countries most severely hit by these shocks. We argue that a reverse pattern of capital flows would have improved the output-inflation trade-off globally, hence requiring a less aggressive monetary tightening in most severely hit countries and delivering overall welfare gains.
Keywords: No keywords provided
JEL Codes: E32; E44; E52; F32; F41; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital flows from low-inflation to high-inflation countries (F32) | upward pressure on firms' marginal costs (D22) |
| upward pressure on firms' marginal costs (D22) | deterioration in the policy trade-off for stabilizing inflation (E63) |
| capital flows into high-inflation countries (F32) | increases demand for nontradable goods and services (J20) |
| increases demand for nontradable goods and services (J20) | raises domestic marginal costs (D40) |
| capital flows (F32) | exacerbates upward price pressures during aggressive monetary tightening (E31) |
| deterioration in the policy trade-off for stabilizing inflation (E63) | central banks need to adopt more contractionary monetary policies (E59) |