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Is Openness Inflationary? Policy Commitment and Imperfect Competition

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  • Richard W. Evans

    ()
    (Department of Economics, Brigham Young University)

Abstract

This paper proposes a channel through which increased openness to international trade can increase a country's long-run incentive to create inflation. The theoretical justifcation for this channel is the well known "beggar thy neighbor" incentive, and its dominance relies on a monetary authority's ability to commit to policy as well as the asymmetric effects of the underlying frictions in the model across domestic and foreign households. Comparing data from the 1973-1987 period and the 1988-2002 period, I Find evidence that the effect of openness on inflation is positive among developed countries whose monetary policy can be approximated by commitment and that the inflationary bias of openness is dampened by the degree of imperfect competition and the inelasticity of labor supply within the country.

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File URL: http://economics.byu.edu/Documents/Macro%20Lab/Working%20Paper%20Series/BYUMCL2012-06.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory in its series BYU Macroeconomics and Computational Laboratory Working Paper Series with number 2012-06.

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Length: 65 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:byu:byumcl:201206

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Keywords: Optimal monetary policy; Imperfect competition; International monetary policy; Openness;

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