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Openness and inflation volatility: cross-country evidence

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  • Christopher Bowdler
  • Adeel Malik

Abstract

Recent decades have seen a considerable expansion of global trade and a simultaneous decline in inflation volatility. This paper investigates whether greater openness to trade helps achieve inflation stability. Using panel data for a sample of developing and industrial countries over the period 1961-2000, we document a negative and statistically significant effect of openness on inflation volatility. This relationship is estimated after controlling for the potential endogenity of openness, and the average rate of inflation. We conduct a battery of robuistness tests, showing in particular the robustness of our conclusions to controlling for the choice of exchange rate regime. A sub-sample analysis suggests that the relationship between openness and inflation volatility is more pronounced in developing and emerging market economies thanin OECD countires. We also identify potential channels underpinning this relationship. In particulare, we provide eveidenc that openness may promote inflation stability through dampening monetary and terms of trade shocks.

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Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2005-08.

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Date of creation: 2005
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Handle: RePEc:csa:wpaper:2005-08

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Keywords: Openness; inflation; globalization; volatility; panel data;

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Cited by:
  1. Ummad Mazhar & Cheick Kader M'baye, 2014. "Does Forecasts Transparency Affect Macroeconomic Volatility in Developing Countries ? Evidence From Quasi-Natural Experiments," Working Papers, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure 1410, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  2. Esteban Colla De Robertis & Last: Colla De Robertis, 2010. "Monetary Committee Size and Special Interest Influence," Documentos de Investigación - Research Papers, Centro de Estudios Monetarios Latinoamericanos, CEMLA 2, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
  3. Carlos Esteban Posada P. & Camilo Morales J., . "Inflación y apertura: evidencia para Colombia (1980-2005)," Borradores de Economia, Banco de la Republica de Colombia 460, Banco de la Republica de Colombia.
  4. Gernot Pehnelt, 2007. "Globalisation and Inflation in OECD Countries," Jena Economic Research Papers, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics 2007-055, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.

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