Inflation Stabilisation with Durable Goods and Endogenous Time Preference*

Abstract

We consider inflation stabilisation policies for a small open economy with an endogenous time preference when consumption exhibits durability. The time preference effect and the durability effect have competing influences on the adjustment of consumption expenditures, which will likely exhibit an initial boom followed by a recession. Further, inflation stabilisation leads to an increase in labour supply and a boom in investment and output. The country experiences a sharp deterioration in its net foreign asset position.