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Globalization,the Output-Inflation Tradeoff, and Inflation

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  • Harald Badinger

Abstract

This paper provides a comprehensive assessment of the relation between inflation and globalization, measured in terms of trade and financial openness. Using a large crosssection of 91 countries covering the period 1985-2004, we establish two main empirical regularities. Both higher trade and financial openness i) reduce central bank?s inflation bias,yielding lower average inflation, and ii) are associated with a larger output-inflation tradeoff. This evidence is at odds with the standard Barro-Gordon framework, which would require globalization to have a negative effect on the output-inflation tradeoff to yield lower equilibrium inflation, but it is consistent with a recent strand of new Keynesian models emphasizing the role of imperfect competition and wage rigidities. Moreover, our findings do not hold up for the OECD subsample, which suggests that a group of highly developed countries has been successful in creating an institutional framework for central banks that eliminates distortions due to the time inconsistency problem.

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Bibliographic Info

Paper provided by FIW in its series FIW Working Paper series with number 010.

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Length: 46
Date of creation: Jan 2008
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Handle: RePEc:wsr:wpaper:y:2008:i:010

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Keywords: Globalization; Trade; Financial Openness; Inflation; Output Inflation Tradeoff;

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Citations

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Cited by:
  1. Igor Da Silva Veiga & Helder Ferreira De Mendonça, 2014. "Financial Openness And Inflationtargeting: An Analysis For The Unpleasant Fiscal Arithmetic," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting] 059, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  2. Eijffinger, S.C.W. & Qian, Z., 2010. "Globalization and the Output-Inflation Tradeoff: New Time Series Evidence," Discussion Paper 2010-27, Tilburg University, Center for Economic Research.
  3. Daniels, Joseph P & VanHoose, David D, 2010. "Exchange-Rate Pass Through, Openness, and the Sacrifice Ratio," Working Papers and Research 2010-05, Marquette University, Center for Global and Economic Studies and Department of Economics.
  4. Steven B. Kamin, 2010. "Financial globalization and monetary policy," International Finance Discussion Papers 1002, Board of Governors of the Federal Reserve System (U.S.).
  5. Tahir Mukhtar, 2010. "Does Trade Openness Reduce Inflation? Empirical Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(2), pages 35-50, Jul-Dec.
  6. Richard W. Evans, 2012. "Is Openness Inflationary? Policy Commitment and Imperfect Competition," BYU Macroeconomics and Computational Laboratory Working Paper Series 2012-06, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.

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