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A note on Romer's openness-inflation relation: the responsiveness of AS and AD to economic openness and monetary policy

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  • Jim Granato
  • Melody Lo
  • M. C. Sunny Wong

Abstract

Temple (2002) empirically challenges Romer's (1993) negative openness-inflation relation on empirical grounds. This article links economic openness to the slopes of aggregate supply (AS) and aggregate demand (AD) to explain why the openness-inflation relation can be ambiguous. Starting with a widely used assumption initiated by Romer (1993) that more open economies face greater output inflation tradeoffs, we demonstrate that greater output-inflation tradeoffs in more open economies (reflected in the steeper AS) induce policymakers to adopt more aggressive optimal monetary policy (reflected in the flatter AD). Empirical results from 15 developed countries' data support our theoretical explanation on the recent empirical failure in finding the negative openness-inflation relation.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 39 (2007)
Issue (Month): 2 ()
Pages: 191-197

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Handle: RePEc:taf:applec:v:39:y:2007:i:2:p:191-197

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  1. Jeffrey A. Frankel and Andrew K. Rose., 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," Center for International and Development Economics Research (CIDER) Working Papers C95-052, University of California at Berkeley.
  2. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting 'M' back in Monetary Policy," NBER Working Papers 9552, National Bureau of Economic Research, Inc.
  3. M. F. Bleaney, 1999. "The Disappearing Openness-Inflation Relationship," IMF Working Papers 99/161, International Monetary Fund.
  4. 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.
  5. Magda Kandil, 1999. "The asymmetric stabilizing effects of price flexibility: historical evidence and implications," Applied Economics, Taylor & Francis Journals, vol. 31(7), pages 825-839.
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Cited by:
  1. Jafari Samimi, Ahmad & Ghaderi, Saman & Sanginabadi, Bahram, 2011. "Openness and Inflation in Iran," MPRA Paper 52408, University Library of Munich, Germany.
  2. Carla Ysusi, 2009. "Analysis of the Dynamics of Mexican Inflation Using Wavelets," Working Papers 2009-09, Banco de México.
  3. Jafari Samimi, Ahmad & Ghaderi, Saman & Hosseinzadeh, Ramezan & Nademi, Younes, 2012. "Openness and inflation: New empirical panel data evidence," Economics Letters, Elsevier, vol. 117(3), pages 573-577.
  4. Jafari Samimi, Ahmad & Ghaderi, Saman & Sanginabadi, Bahram, 2012. "The Effects of Openness and Globalization on Inflation: An ARDL Bounds Test Approach," MPRA Paper 52407, University Library of Munich, Germany.

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