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Openness, Inflation, and the Phillips Curve: A Puzzle

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  • Temple, Jonathan

Abstract

Models of open economies with nominal rigidities are often thought to predict a correlation between openness to trade and the slope of the output-inflation trade-off, or Phillips curve. Using a variety of measures of the trade-off and a standard measure of openness, this paper argues that the direct evidence for a correlation is not strong. In turn, this calls into question the usual explanation for the negative correlation between openness and inflation that was documented by Romer (1993). The paper considers some alternative explanations for the Romer evidence.

Suggested Citation

  • Temple, Jonathan, 2002. "Openness, Inflation, and the Phillips Curve: A Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 450-468, May.
  • Handle: RePEc:mcb:jmoncb:v:34:y:2002:i:2:p:450-68
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    References listed on IDEAS

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    1. Martin Eichenbaum & Charles L. Evans, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 975-1009.
    2. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    3. repec:sbe:breart:v:17:y:1997:i:2:a:2865 is not listed on IDEAS
    4. Hardouvelis, Gikas A., 1992. "Monetary policy games, inflationary bias, and openness," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 147-164, January.
    5. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
    6. Gonzaga, Gustavo M. & Terra, Maria Cristina T., 1997. "Equilibrium real exchange rate, volatility, and stabilization," Journal of Development Economics, Elsevier, vol. 54(1), pages 77-100, October.
    7. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    8. Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, vol. 42(3-4), pages 327-347, May.
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    10. Barry, F., 1998. "Openness and the Cost of Relinquishing the Exchange Rate," Papers 98/15, College Dublin, Department of Political Economy-.
    11. David Romer, 1998. "A New Assessment of Openness and Inflation: Reply," The Quarterly Journal of Economics, Oxford University Press, vol. 113(2), pages 649-652.
    12. David Romer, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 869-903.
    13. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May.
    14. Thomas Jordan, 1997. "Disinflation costs, accelerating inflation gains, and central bank independence," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 133(1), pages 1-21, March.
    15. Michael Bruno & Jeffrey D. Sachs, 1985. "Economics of Worldwide Stagflation," NBER Books, National Bureau of Economic Research, Inc, number brun85-1.
    16. Cristina T. Terra, 1998. "Openness and Inflation: A New Assessment," The Quarterly Journal of Economics, Oxford University Press, vol. 113(2), pages 641-648.
    17. Frank Harrigan & Peter G. McGregor & Kim Swales & Ya Ping Yin, 1993. "Openness, Imperfect Competition and the NAIRU," Journal of Economic Studies, Emerald Group Publishing, vol. 20(1/2), pages 52-72, January.
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