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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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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;

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