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Capital Mobility and the Output-Inflation Tradeoff

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  • Assaf Razin
  • Prakash Loungani
  • Chi-Wa Yuen

Abstract

Identifying determinants of the output-inflation tradeoff has long been a key issue in business cycle research. We provide evidence that in countries with greater restrictions on capital mobility, a given reduction in the inflation rate is associated with a smaller loss in output. This result is shown to be consistent with theoretical presumption from a version of the Mundell-Fleming model. Restrictions on capital mobility are measured using the IMF’s Annual Report on Exchange Rate Arrangements and Exchange Restrictions. Estimates of the output-inflation tradeoff are taken from previous studies, viz., Lucas (1973) and Ball, Mankiw and Romer (1988).

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 00/87.

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Length: 22
Date of creation: 01 May 2000
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Handle: RePEc:imf:imfwpa:00/87

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Keywords: Capital controls; inflation; capital mobility; aggregate demand; inflation rate; price level; capital transactions; money growth; rate of inflation; money supply; inflation rates; real interest rate; nominal rate of interest; monetary policy; capital flows; foreign currency; international capital; capital movements; capital accounts; real rate of interest; average rate of inflation; nominal interest rate; real output; general price level; ratio of imports; average inflation rate; foreign security; rational expectations; change in inflation; real variables; black market; average inflation; nominal variables;

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  1. Romer, David, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(4), pages 869-903, November.
  2. Assaf Razin & Andrew Rose, 1992. "Business Cycle Volatility and Openness: An Exploratory Cross-Section Analysis," NBER Working Papers 4208, National Bureau of Economic Research, Inc.
  3. Leonardo Bartolini & Allan Drazen, 1996. "When Liberal Policies Reflect External Shocks, What Do We Learn?," NBER Working Papers 5727, National Bureau of Economic Research, Inc.
  4. Alberro, Jose, 1981. "The Lucas hypothesis on the Phillips Curve : Further international evidence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 7(2), pages 239-250.
  5. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
  6. Jacob Frenkel & Assaf Razin, 1996. "Fiscal Policies and Growth in the World Economy," MIT Press Books, The MIT Press, The MIT Press, edition 3, volume 1, number 0262561042, December.
  7. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, National Bureau of Economic Research, Inc, in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc.
  8. DeFina, Robert H, 1991. "International Evidence on a New Keynesian Theory of the Output-Inflation Trade-Off," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 23(3), pages 410-22, August.
  9. Kormendi, Roger C & Meguire, Philip G, 1984. "Cross-Regime Evidence of Macroeconomic Rationality," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(5), pages 875-908, October.
  10. Beggs, John J, 1988. "Diagnostic Testing in Applied Econometrics," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 64(185), pages 81-101, June.
  11. Vittorio Grilli & Gian-Maria Milesi-Ferretti, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Working Papers 95/31, International Monetary Fund.
  12. Papell, D.H., 1988. "Expectations And Exchange Rate Dynamics After A Decade Of Floating," Papers, Houston - Department of Economics 9, Houston - Department of Economics.
  13. Davide Fiaschi, 1996. "Fiscal policies and growth," Working Papers 261, Dipartimento Scienze Economiche, Universita' di Bologna.
  14. Addison, John T. & Chappell, Henry Jr. & Castro, Alberto C., 1986. "Output-inflation tradeoffs in 34 countries," Journal of Economics and Business, Elsevier, Elsevier, vol. 38(4), pages 353-360, December.
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