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

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.