Inflation in a small Open Economy: A Case Study of Sweden

Abstract

The paper attempts to identify the leading sources of inflation and their switching behavior following a change in the exchange rate regime in a small open economy like Sweden. Before regime changes the leading sources of inflation were real GDP. exchange rate, money supply and the foreign price respective ly. In this period, the foreign impact-via devaluation and foreign price expressed in foreign currency-on domestic inflation was positi\ve. After the regime changes, the sources are exchange rate. import prices, money supply and real GDP respectively. In this period. the foreign impact-via depreciation and foreign price expressed in foreign currency-on domestic inflation is negative. ECM has been used in the empirical study.