The Cost of Disinflation in a Small Open Economy Vis-À-Vis a Closed Economy

We use a standard new Keynesian model to evaluate the disinflation cost in a small open economy vis-à-vis a closed economy. Three measures of the cost are evaluated: the sacrifice ratio, the central bank’s loss, and the welfare of the representative agent. We show that in the small open economy: (i) welfare benefit of disinflation is lower; (ii) sacrifice ratio and the central bank’s loss are higher; (iii) lack of credibility can be more costly; and (iv) monetary policy rules can be different from the closed economy