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Openness And The Output-Inflation Tradeoff: Floating Vs. Fixed Exchange Rates

  • Yuen Chi-Wa
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    The paper is an attempt to understand how globalization (in the form of opening up an otherwise closed economy to commodity trade and foreign investment) would interact with the exchange rate regime chosen by a small open economy to determine its output-inflation tradeoff. Based on the stochastic dynamic Mundell-Fleming model, our theory suggests that, under “normal” circumstances, the Phillips curve would be flatter under a fixed exchange rate regime. We also provide some empirical support based on Hong Kong data. [E2; F3]

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    Article provided by Taylor & Francis Journals in its journal International Economic Journal.

    Volume (Year): 16 (2002)
    Issue (Month): 4 ()
    Pages: 1-26

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    Handle: RePEc:taf:intecj:v:16:y:2002:i:4:p:1-26
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    1. Laxton, Douglas & Rose, David & Tambakis, Demosthenes, 1999. "The U.S. Phillips curve: The case for asymmetry," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1459-1485, September.
    2. Yum K. Kwan & Francis T. Lui, 1996. "Hong Kong's Currency Board and Changing Monetary Regimes," NBER Working Papers 5723, National Bureau of Economic Research, Inc.
    3. Clark, Peter B. & Goodhart, Charles A. E. & Huang, Haizhou, 1999. "Optimal monetary policy rules in a rational expectations model of the Phillips curve," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 497-520, April.
    4. Loungani, Prakash & Razin, Assaf & Yuen, Chi-Wa, 1997. "Capital Mobility and the Output-Inflation Tradeoff," CEPR Discussion Papers 1577, C.E.P.R. Discussion Papers.
    5. Assaf Razin & Chi-Wa Yuen, 2001. "The "New Keynesian" Phillips Curve: Closed Economy vs. Open Economy," NBER Working Papers 8313, National Bureau of Economic Research, Inc.
    6. Lane, P, 1999. "The New Open Economy Macroeconomics: A Survey," Trinity Economics Papers 993, Trinity College Dublin, Department of Economics.
    7. Kool,C.J.M. & Lammertsma,A., 1997. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique:Evidence from Exchange-Rate Regimes: Comment," Research Memorandum 020, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    8. Bennett T. McCallum, 1987. "Inflation: Theory and Evidence," NBER Working Papers 2312, National Bureau of Economic Research, Inc.
    9. David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
    10. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
    11. Michael T. Kiley, 1998. "Monetary policy under neoclassical and New-Keynesian Phillips Curves, with an application to price level and inflation targeting," Finance and Economics Discussion Series 1998-27, Board of Governors of the Federal Reserve System (U.S.).
    12. Frenkel, Jacob & razin, assaf & Yuen, chi-wa, 1996. "Fiscal policies and growth in the world economy," MPRA Paper 22109, University Library of Munich, Germany.
    13. repec:nbr:nberre:0126 is not listed on IDEAS
    14. DiNardo, J. & Moore, M.P., 1999. "The Phillips Curve is Back? Using Panel Data to Analyze the Relationship Between Unemployment and Inflation in an Open Economy," Papers 99-00-04, California Irvine - School of Social Sciences.
    15. Papell, D.H., 1988. "Expectations And Exchange Rate Dynamics After A Decade Of Floating," Papers 9, Houston - Department of Economics.
    16. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
    17. Frederic S. Mishkin, 1980. "Does Anticipated Monetary Policy Matter? An Econometric Investigation," NBER Working Papers 0506, National Bureau of Economic Research, Inc.
    18. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    19. Alogoskoufis, George S & Smith, Ron, 1991. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes," American Economic Review, American Economic Association, vol. 81(5), pages 1254-75, December.
    20. Robert P. Flood & Nancy Peregrim Marion, 1982. "The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing," The Quarterly Journal of Economics, Oxford University Press, vol. 97(1), pages 43-66.
    21. James Tobin, 1980. "Stabilization Policy Ten Years After," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(1, Tenth ), pages 19-90.
    22. D. Fiaschi, 1996. "Fiscal policies and growth," Working Papers 261, Dipartimento Scienze Economiche, Universita' di Bologna.
    23. Gordon, Robert J, 1989. "Hysteresis in History: Was There Ever a Phillips Curve?," American Economic Review, American Economic Association, vol. 79(2), pages 220-25, May.
    24. Andrew Atkeson & Lee E. Ohanian, 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
    25. Ghironi, Fabio & Giavazzi, Francesco, 1998. "Currency areas, international monetary regimes, and the employment-inflation tradeoff," Journal of International Economics, Elsevier, vol. 45(2), pages 259-296, August.
    26. Robert Dittmar & William T. Gavin, 2000. "What do New-Keynesian Phillips Curves imply for price-level targeting?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 21-30.
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