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International Spillover Effects And Monetary Policy Activism

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Executive Summary

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. The authors 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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