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Openness and inflation

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  • Mark A. Wynne
  • Erasmus K. Kersting

Abstract

This paper reviews the evidence on the relationship between openness and inflation. There is a robust negative relationship across countries, first documented by Romer (1993), between a country's openness to trade and its long-run inflation rate. However, a key part of the standard explanation for this relationship—that central banks have a smaller incentive to engineer surprise inflations in more-open economies because the Phillips curve is steeper—seems at odds with the facts. While the United States is still not a very open economy by conventional measures, there are channels through which global developments may influence the nation's inflation. We document evidence that global resource utilization may play a role in U.S. inflation and suggest avenues for future research.

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File URL: http://www.dallasfed.org/assets/documents/research/staff/staff0702.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of Dallas in its journal Staff Papers.

Volume (Year): (2007)
Issue (Month): Apr ()
Pages:

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Handle: RePEc:fip:feddst:y:2007:i:apr:n:2

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Keywords: Inflation (Finance) ; Trade ; Phillips curve;

References

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  1. Assaf Razin & Prakash Loungani & Chi-Wa Yuen, 2000. "Capital Mobility and the Output-Inflation Tradeoff," IMF Working Papers 00/87, International Monetary Fund.
  2. Stefania Albanesi & V.V. Chari & Lawrence J. Christiano, 2002. "Expectation Traps and Monetary Policy," NBER Working Papers 8912, National Bureau of Economic Research, Inc.
  3. William C. Gruben & Darryl McLeod, 2003. "The openness-inflation puzzle revisited," Center for Latin America Working Papers 0203, Federal Reserve Bank of Dallas.
  4. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
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  6. Razin, Assaf & Yuen, Chi-Wa, 2001. "The 'New Keynesian' Phillips Curve: Closed Economy versus Open Economy," CEPR Discussion Papers 3083, C.E.P.R. Discussion Papers.
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  9. Karras, Georgios, 1999. "Openness and the effects of monetary policy," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 13-26, January.
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  11. Alfaro, Laura, 2005. "Inflation, openness, and exchange-rate regimes: The quest for short-term commitment," Journal of Development Economics, Elsevier, vol. 77(1), pages 229-249, June.
  12. Marta Campillo & Jeffrey A. Miron, 1997. "Why Does Inflation Differ across Countries?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 335-362 National Bureau of Economic Research, Inc.
  13. David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  14. Richard B. Freeman, 2006. "People Flows in Globalization," Journal of Economic Perspectives, American Economic Association, vol. 20(2), pages 145-170, Spring.
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  17. Geoffrey M.B. Tootell, 1998. "Globalization and U.S. inflation," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 21-33.
  18. Sachsida, Adolfo & Carneiro, Francisco Galrao & Loureiro, Paulo R. A., 2003. "Does greater trade openness reduce inflation? Further evidence using panel data techniques," Economics Letters, Elsevier, vol. 81(3), pages 315-319, December.
  19. Kenneth Rogoff, 2003. "Globalization and global disinflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 45-78.
  20. Neiss, Katharine S, 1999. "Discretionary Inflation in a General Equilibrium Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 357-74, August.
  21. Helmut Wagner, 2002. "Implications of Globalization for Monetary Policy," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  22. Temple, Jonathan, 2002. "Openness, Inflation, and the Phillips Curve: A Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 450-68, May.
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