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Openness, imported commodities and the Phillips Curve

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  • Andrew Pickering
  • Hector Valle

    ()

Abstract

This paper derives a Phillips curve with imported commodities as an additional input in the production process. Given greater reliance on exogenously priced imported commodities in production then changes in output lead to a reduced impact on marginal costs and prices. The Phillips curve becomes flatter relative to the bench-mark New Keynesian case. Empirical evidence supports the hypothesis that greater imported commodity intensity in production increases the sacrifice ratio. Econometrically controlling for imported commodity intensity also doubles the explanatory power of openness in determining the sacrifice ratio, as conjectured by Romer (1993).

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File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp08608.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Bristol, UK in its series Bristol Economics Discussion Papers with number 08/608.

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Length: 29 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:bri:uobdis:08/608

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Keywords: openness; imported commodities; sacrifice ratio;

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  1. David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Nov.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(1), pages 1-48, February.
  3. Daniels, Joseph P & Nourzad, Farrokh & Vanhoose, David D, 2005. "Openness, Central Bank Independence, and the Sacrifice Ratio," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 37(2), pages 371-79, April.
  4. Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, Elsevier, vol. 42(3-4), pages 327-347, May.
  5. Bowdler, Christopher, 2009. "Openness, exchange rate regimes and the Phillips curve," Journal of International Money and Finance, Elsevier, Elsevier, vol. 28(1), pages 148-160, February.
  6. Daniels, Joseph P. & VanHoose, David D., 2006. "Openness, the sacrifice ratio, and inflation: Is there a puzzle?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 25(8), pages 1336-1347, December.
  7. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 101-121.
  8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  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, University of Chicago Press, vol. 85(3), pages 473-91, June.
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