International transmission of anticipated inflation under alternative exchange-rate regimes

This paper studies the international transmission of anticipated inflation. A two-country, two-good, two-currency, cash-in-advance model is used to ex amine analytically and numerically the consequences of changes in a country 's inflation rate. Domestic monetary policy influences real activity at hom e through an inflation-tax channel. These real effects are transmitted to t he foreign country via fluctuations in the real exchange rate. Under a flex ible nominal exchange rate, inflation is a beggar-thy-neighbor policy. Unde r a fixed nominal exchange rate, each country suffers a welfare loss when o ne country inflates. The quantitative results are fairly insensitive to var iations in the cash-credit mix used to finance investment expenditures. (C) 2001 Elsevier Science Ltd. All rights reserved.