Inflation Dynamics and Trade Openness

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Inflation Dynamics and Trade Openness

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Aron, Janine
Muellbauer, John

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Abstract

It is difficult to obtain reliable measures of evolving openness to trade, despite its relevance to models of growth, inflation and exchange rates. Our innovative technique measures trade openness encompassing both observable trade policy (tariffs and surcharges) and unobservable trade policy (quotas and other non-tariff barriers), and such factors as capital controls, sanctions and dual exchange rates (often used in composite trade measures). The share of manufactured imports in home demand for manufactured goods is estimated in STAMP (Koopman et al., 2000) using measured trade policy and controlling for fluctuations in domestic demand, relative prices of imports and the exchange rate. The unmeasured trade policy component is captured by a smooth non-linear stochastic trend. The two elements of openness, the stochastic trend and the rates of tariffs and surcharges, are included in a model of wholesale price inflation in South Africa. The evidence suggests that increased openness has significantly reduced the mean inflation rate and has reduced the exchange rate pass-through into wholesale prices.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6346.

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Date of creation: Jun 2007
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Handle: RePEc:cpr:ceprdp:6346

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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-06-30 (All new papers)
NEP-CBA-2007-06-30 (Central Banking)
NEP-INT-2007-06-30 (International Trade)
NEP-MAC-2007-06-30 (Macroeconomics)
NEP-MON-2007-06-30 (Monetary Economics)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Rose, Andrew K., 2004. "Do WTO members have more liberal trade policy?," Journal of International Economics, Elsevier, vol. 63(2), pages 209-235, July. [Downloadable!] (restricted)
Other versions:
- Rose, Andrew K, 2002. "Do WTO Members have More Liberal Trade Policy?," CEPR Discussion Papers 3659, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
- Andrew K. Rose, 2002. "Do WTO Members have More Liberal Trade Policy?," NBER Working Papers 9347, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Wacziarg, Romain, 1998. "Measuring the dynamic gains from trade," Policy Research Working Paper Series 2001, The World Bank. [Downloadable!]
Other versions:
- Wacziarg, Romain, 2000. "Measuring the Dynamic Gains from Trade," Research Papers 1654, Stanford University, Graduate School of Business. [Downloadable!]
Lucio Sarno, 2005. "Towards a Solution to the Puzzles in Exchange Rate Economics: Where Do We Stand?," Working Papers wp05-11, Warwick Business School, Financial Econometrics Research Centre. [Downloadable!]
Summers, Robert & Heston, Alan, 1988. "A New Set of International Comparisons of Real Product and Price Levels Estimates for 130 Countries, 1950-1985," Review of Income and Wealth, Blackwell Publishing, vol. 34(1), pages 1-25, March.
Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Aron, Janine & Muellbauer, John, 2009. "Some Issues in Modeling and Forecasting Inflation in South Africa," CEPR Discussion Papers 7183, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Aron, Janine & Muellbauer, John, 2008. "Monetary Policy and Inflation Modeling in a More Open Economy in South Africa," CEPR Discussion Papers 6992, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)

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