Openness and inflaton volatility: Cross-country evidence
AbstractRecent 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2005-W14.
Date of creation: 01 May 2005
Date of revision:
Openness; Inflation; Globalization; Volatility; Panel Data;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- O57 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
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.:
- Sachsida, Adolfo & Carneiro, Francisco Galrao & Loureiro, Paulo R. A., 2003. "Does greater trade openness reduce inflation? Further evidence using panel data techniques," Economics Letters, Elsevier, vol. 81(3), pages 315-319, December.
- Aisen, Ari & Veiga, Francisco José, 2008.
"The political economy of seigniorage,"
Journal of Development Economics,
Elsevier, vol. 87(1), pages 29-50, August.
- Cristina T. Terra, 1998.
"Openness And Inflation: A New Assessment,"
The Quarterly Journal of Economics,
MIT Press, vol. 113(2), pages 641-648, May.
- Catao, Luis A.V. & Terrones, Marco E., 2005.
"Fiscal deficits and inflation,"
Journal of Monetary Economics,
Elsevier, vol. 52(3), pages 529-554, April.
- Jim Granato & Melody Lo & M. C. Sunny Wong, 2006. "Testing Monetary Policy Intentions in Open Economies," Southern Economic Journal, Southern Economic Association, vol. 72(3), pages 730-746, January.
- Marianne Baxter & Michael A. Kouparitsas, 2006.
"What Can Account for Fluctuations in the Terms of Trade?,"
Wiley Blackwell, vol. 9(1), pages 63-86, 05.
- Marianne Baxter & Michael A. Kouparitsas, 2000. "What Can Account for Fluctuations in the Terms of Trade?," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-112, Boston University - Department of Economics.
- Marianne Baxter & Michael A. Kouparitsas, 2000. "What can account for fluctuations in the terms of trade?," Working Paper Series WP-00-25, Federal Reserve Bank of Chicago.
- Aisen, Ari & Veiga, Francisco Jose, 2006.
"Does Political Instability Lead to Higher Inflation? A Panel Data Analysis,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 38(5), pages 1379-1389, August.
- Ari Aisen & Francisco JosÃ© Veiga, 2005. "Does Political Instability Lead to Higher Inflation? A Panel Data Analysis," IMF Working Papers 05/49, International Monetary Fund.
- Lal, Deepak & Myint, H., 1998. "The Political Economy of Poverty, Equity and Growth: A Comparative Study," OUP Catalogue, Oxford University Press, number 9780198294320.
- Bleaney, Michael & Fielding, David, 2002. "Exchange rate regimes, inflation and output volatility in developing countries," Journal of Development Economics, Elsevier, vol. 68(1), pages 233-245, June.
- Chen, Natalie & Imbs, Jean & Scott, Andrew, 2004. "Competition, Globalization and the Decline of Inflation," CEPR Discussion Papers 4695, C.E.P.R. Discussion Papers.
- Byrne, Joseph P. & Davis, E. Philip, 2004. "Permanent and temporary inflation uncertainty and investment in the United States," Economics Letters, Elsevier, vol. 85(2), pages 271-277, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Caroline Wise).
If references are entirely missing, you can add them using this form.