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Trade Openness, Market Competition, and Inflation: Some Sectoral Evidence from OECD Countries

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  • Mahir Binici
  • Yin-Wong Cheung
  • Kon S. Lai

Abstract

This study evaluates the role market competition plays in determining inflation based on sector-level data from OECD countries. In theory, trade openness can affect inflation through changes in market competitiveness and productivity. Nonetheless, previous empirical studies often fail to account for productivity effects, and their results may overstate the role of market competition. This study shows that inflation decreases with greater market competitiveness even after controlling for productivity effects. Indeed, when market competition and productivity effects are both accounted for, trade openness becomes insignificant in explaining inflation. The results support that changes in market competitiveness and productivity are the main channels through which trade openness affects inflation.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3690.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3690

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Keywords: trade openness; inflation; market structure; static panel; dynamic panel;

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Cited by:
  1. Raphael A Auer & Aaron Mehrotra, 2014. "Trade linkages and the globalisation of inflation in Asia and the Pacific," BIS Working Papers 447, Bank for International Settlements.
  2. Costa Junior, Celso Jose, 2012. "Institutional Barrier and the World Income Distribution," MPRA Paper 45633, University Library of Munich, Germany.

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