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Globalization and Inflation-Output Tradeoffs

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Author Info
Assaf Razin
Prakash Loungani

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Abstract

We demonstrate how capital account and trade account liberalizations help reduce inefficiencies associated with the fluctuations in the output gap, relative to the inefficiencies associated with the fluctuations in inflation. With capital account liberalization the representative household is able to smooth fluctuations in consumption, and thus becomes relatively insensitive to fluctuations in the output gap. With trade liberalization the economy tends to specialize in production but not in consumption. The correlation between fluctuations in the output gap and aggregate consumption is therefore weakened by trade openness; hence a smaller weight on the output gap in the utility-based loss function, compared to the closed economy situations.A key implication of the theory is that globalization forces could induce monetary authorities, to put a greater emphasis on reducing the inflation rate than on narrowing the output gaps. We provide a re- interpretation of the evidence on the effect of openness on the sacrifice ratio which supports the prediction of the theory.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11641.

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Date of creation: Sep 2005
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Handle: RePEc:nbr:nberwo:11641

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E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
F3 - International Economics - - International Finance

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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.:
  1. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2004. "Competition, Globalization and the Decline of Inflation," CEPR Discussion Papers 4695, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Blackwell Publishing, vol. 70(4), pages 743-764, October. [Downloadable!] (restricted)
  3. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  4. Luca Benati, 2003. "Evolving Post-World War II U.K. Economic Performance," Computing in Economics and Finance 2003 171, Society for Computational Economics.
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  5. Daniels, Joseph P & Nourzad, Farrokh & Vanhoose, David D, 2005. "Openness, Central Bank Independence, and the Sacrifice Ratio," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 371-79, April.
  6. Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, vol. 42(3-4), pages 327-347, May. [Downloadable!] (restricted)
  7. David Romer, 1998. "A New Assessment Of Openness And Inflation: Reply," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 649-652, May. [Downloadable!] (restricted)
  8. Romer, David, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 869-903, November. [Downloadable!] (restricted)
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  9. Bianca De Paoli, 2004. "Monetary Policy and Welfare in a Small Open Economy," CEP Discussion Papers dp0639, Centre for Economic Performance, LSE. [Downloadable!]
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  10. Temple, Jonathan, 2002. "Openness, Inflation, and the Phillips Curve: A Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 450-68, May.
  11. Richard N. Cooper, 1999. "Should Capital Controls be Banished?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1999-1), pages 89-142. [Downloadable!]
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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.)

  1. Fabio Milani, 2008. "Does Global Slack Matter More than Domestic Slack in Determining U.S. Inflation?," Working Papers 080910, University of California-Irvine, Department of Economics. [Downloadable!]
    Other versions:
  2. Ernst Glatzer & Ernest Gnan & Maria Teresa Valderrama, 2006. "Globalization, Import Prices and Producer Prices in Austria," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 24-43, November . [Downloadable!]
  3. Marvin Goodfriend, 2007. "International Adjustment in the New Neoclassical Synthesis," Kiel Working Papers 1345, Kiel Institute for the World Economy. [Downloadable!]
  4. Forte, Antonio, 2009. "The stability of the inflation rate in the Euro area: the role of Globalization and labour market," MPRA Paper 16587, University Library of Munich, Germany. [Downloadable!]
  5. Gaiotti, Eugenio, 2008. "Has globalisation changed the Phillips curve? Firm-level evidence on the effect of activity on prices," MPRA Paper 8389, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  6. Kenneth S. Rogoff, 2006. "Impact of globalization on monetary policy," Proceedings, Federal Reserve Bank of Kansas City, pages 265-305. [Downloadable!]
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