Yinxi Xie is a Senior Economist in the Model Development Division of the Canadian Economic Analysis Department and in the Economic and Financial Research Department. His research interests lie in the fields of Monetary Economics, International Macroeconomics, Behavioral Macroeconomics, and International Finance. Yinxi receives his Ph.D. in Economics from Columbia University, USA.
This paper studies exchange rate dynamics by incorporating bounded rationality, that is, limited foresight, in a small open-economy model. This behavior of limited foresight helps explain several observations and puzzles in the data of exchange rate movements.
We study the impact government expenditure has on inflation. We find that changes in government expenditure account for a substantial portion of inflation variations. We also find that inflation and inflation expectations respond negatively to fiscal spending shocks, reaffirming the supply-side channel through which inflation responds to fiscal expansions.
We build a tractable New Keynesian model to study and compare four types of monetary and fiscal policy: policy rate adjustments, quantitative easing, lump-sum fiscal transfers and government spending. We find that tax-financed fiscal policy is more stimulative than debt-financed policy, and optimal policy coordination needs at least two of these four policy instruments.
We find that the CPI and PPI inflation indexes co-moved strongly throughout the late 20th century, but their correlation has fallen substantially since the early 2000s. We offer a structural explanation for this divergence based on the growth of global supply chains since 2000. This finding offers a unique perspective for the future design of optimal monetary policy.
How do outcomes of monetary and fiscal stabilization policies at the zero lower bound change when decision makers have finite planning horizons in the economy? We explore the effects of limited foresight on policy tools and the interaction between monetary and fiscal policy.