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Globalization, the output-inflation tradeoff and inflation

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  • Badinger, Harald

Abstract

This paper provides comprehensive evidence on the relation between inflation and globalization, defined here as trade and financial openness, using a large cross-section of 91 countries over the period 1985-2004. We establish two main empirical regularities: both higher trade and financial openness (i) reduce central banks' inflation bias, yielding lower average inflation and (ii) are associated with a larger output-inflation tradeoff. This evidence is at odds with the standard Barro-Gordon framework, which would require globalization to have a negative effect on the output-inflation tradeoff to yield lower equilibrium inflation, but it is consistent with a recent strand of new Keynesian models emphasizing the role of imperfect competition and nominal rigidities. Our findings also support the relevance of the time-inconsistency hypothesis, which underlies the theoretical models predicting a relation between globalization and inflation. For the OECD subsample, however, we do not find an effect of openness on inflation (the output-inflation tradeoff), suggesting that these countries have created an institutional framework for central banks that eliminates distortions due to the time-inconsistency problem.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 53 (2009)
Issue (Month): 8 (November)
Pages: 888-907

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Handle: RePEc:eee:eecrev:v:53:y:2009:i:8:p:888-907

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Web page: http://www.elsevier.com/locate/eer

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Keywords: Globalization Trade Financial Openness Inflation;

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Citations

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Cited by:
  1. Daniels, Joseph P & VanHoose, David D, 2010. "Exchange-Rate Pass Through, Openness, and the Sacrifice Ratio," Working Papers and Research 2010-05, Marquette University, Center for Global and Economic Studies and Department of Economics.
  2. Tahir Mukhtar, 2010. "Does Trade Openness Reduce Inflation? Empirical Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, Department of Economics, The Lahore School of Economics, vol. 15(2), pages 35-50, Jul-Dec.
  3. Eijffinger, S.C.W. & Qian, Z., 2010. "Globalization and the Output-Inflation Tradeoff: New Time Series Evidence," Discussion Paper, Tilburg University, Center for Economic Research 2010-27, Tilburg University, Center for Economic Research.
  4. Steven B. Kamin, 2010. "Financial globalization and monetary policy," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1002, Board of Governors of the Federal Reserve System (U.S.).
  5. Evans, Richard W., 2012. "Is openness inflationary? Policy commitment and imperfect competition," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(4), pages 1095-1110.
  6. Igor Da Silva Veiga & Helder Ferreira De Mendonça, 2014. "Financial Openness And Inflationtargeting: An Analysis For The Unpleasant Fiscal Arithmetic," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Grad 059, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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