No. 35 (2011)
Artículos

Inflation Volatility and Growth in a Stochastic Small Open Economy: A Mixed Jump-Diffusion Approach

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  • Isela Téllez León,
  • Francisco Venegas Martínez,
  • Abigail Rodríguez Nava
Isela Téllez León
Instituto Politécnico Nacional
Bio
Francisco Venegas Martínez
Instituto Politécnico Nacional
Bio
Abigail Rodríguez Nava
Universidad Autónoma Metropolitana-Xochimilco
Bio
DOI: https://doi.org/10.24275/ETYPUAM/NE/352011/Tellez
Published December 1, 2011
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Abstract

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.
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