Exchange-Rate Pass Through, Openness, Inflation, and the Sacrifice Ratio
AbstractConsiderable recent work has reached mixed conclusions about whether and how globalization affects the inflation-output trade-off and realized inflation rates. In this paper, we utilize cross-country data to provide evidence of interacting effects between a greater extent of exchange-rate pass through and openness to international trade as factors that we find both contribute to lower inflation. The interplay between the inflation effects of pass through and openness suggest that both factors may influence the terms of the output-inflation trade-off. We develop a simple theoretical model showing how both pass through and openness can interact to influence the sacrifice ratio, and we empirically explore the nature of the interplay between the two variables as factors influencing the sacrifice ratio. Our results indicate that a greater extent of pass through depresses the sacrifice ratio and that once the extent of pass through is taken into account alongside other factors that affect the sacrifice ratio, the degree of openness to international trade exerts an empirically ambiguous effect on the sacrifice ratio.
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Bibliographic InfoPaper provided by Marquette University, Center for Global and Economic Studies and Department of Economics in its series Working Papers and Research with number 0901.
Length: 24 pages
Date of creation: Sep 2009
Date of revision:
Pass Through; Openness; Sacrifice Ratio;
Find related papers by JEL classification:
- F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-09-26 (All new papers)
- NEP-CBA-2009-09-26 (Central Banking)
- NEP-MON-2009-09-26 (Monetary Economics)
- NEP-OPM-2009-09-26 (Open Economy Macroeconomic)
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- Eijffinger, S.C.W. & Qian, Z., 2010.
"Globalization and the Output-Inflation Tradeoff: New Time Series Evidence,"
2010-27, Tilburg University, Center for Economic Research.
- Eijffinger, Sylvester C. W. & Qian, Zongxin, 2010. "Globalization and the Output-inflation Tradeoff: New Time Series Evidence," CEPR Discussion Papers 7718, C.E.P.R. Discussion Papers.
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