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Openness and inflation: theory and evidence

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  • David Romer

Abstract

Because unanticipated monetary expansion leads to real exchange rate depreciation and because the harms of real depreciation are greater in more open economies, the benefits of unanticipated expansion are decreasing in the degree of openness. Models in which the absence of precommitment in monetary policy leads to excessive inflation, therefore, predict lower average inflation in more open economies. This paper tests this prediction using cross-country data. The data show a strong and robust negative link between openness and inflation. Copyright 1993, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.

Volume (Year): (1991)
Issue (Month): Nov ()
Pages:

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Handle: RePEc:fip:fedfpr:y:1991:i:nov:x:3

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Keywords: Monetary policy ; Inflation (Finance);

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References

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  1. Driscoll, Michael J & Lahiri, Ashok, K, 1983. "Income-Velocity of Money in Agricultural Developing Economies," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 393-401, August.
  2. Ball, Laurence & Romer, David, 1990. "Real Rigidities and the Non-neutrality of Money," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 183-203, April.
  3. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  4. Fischer, Stanley, 1990. "Rules versus discretion in monetary policy," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 21, pages 1155-1184 Elsevier.
  5. Alberto Alesina, 1988. "Macroeconomics and Politics," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 13-62 National Bureau of Economic Research, Inc.
  6. Sheffrin, S.M., 1988. "Two Tests Of Rational Partisan Business Cycle Theory," Papers 54, California Davis - Institute of Governmental Affairs.
  7. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  8. Ray C. Fair, 1986. "International Evidence on the Demand for Money," Cowles Foundation Discussion Papers 813, Cowles Foundation for Research in Economics, Yale University.
  9. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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  1. Openness and Inflation: Theory and Evidence (QJE 1993) in ReplicationWiki

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