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Openness and inflation volatility: Cross-country evidence

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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 endogeneity of openness, and the average rate of inflation. We conduct a battery of robustness 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 than in OECD countries. We also identify potential channels underpinning this relationship. In particular, we provide evidence that openness may promote inflation stability through dampening monetary and terms of trade shocks.

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File URL: http://www.nuffield.ox.ac.uk/economics/papers/2005/w14/Maydraft2.pdf
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Bibliographic Info

Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2005-W14.

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Length: 48 pages
Date of creation: 15 Mar 2005
Date of revision:
Handle: RePEc:nuf:econwp:0514

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Web page: http://www.nuff.ox.ac.uk/economics/

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

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Cited by:
  1. Carlos Esteban Posada & Camilo Morales J., 2007. "Inflación y apertura: evidencia para Colombia (1980-2005)," BORRADORES DE ECONOMIA 004286, BANCO DE LA REPÚBLICA.
  2. Esteban Colla De Robertis & Last: Colla De Robertis, 2010. "Monetary Committee Size and Special Interest Influence," Documentos de Investigación - Research Papers 2, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
  3. Ummad Mazhar & Cheick Kader M'baye, 2014. "Does Forecasts Transparency Affect Macroeconomic Volatility in Developing Countries ? Evidence From Quasi-Natural Experiments," Working Papers 1410, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  4. Gernot Pehnelt, 2007. "Globalisation and Inflation in OECD Countries," Jena Economic Research Papers 2007-055, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.

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