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Openness and Inflation

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  • DUDLEY COOKE

Abstract

This paper develops a two‐country general equilibrium model to analyze the optimal rate of inflation under discretion. When agents' welfare is the sole policy objective it is possible to show that openness and inflation no longer have a simple inverse relationship. Because the terms of trade are related to monopoly markups, a greater degree of openness may lead the policymaker to exploit the short‐run Phillips curve more aggressively, even if it involves a smaller short‐run benefit. Inflation can then be higher in a more open economy.

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  • Dudley Cooke, 2010. "Openness and Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(2‐3), pages 267-287, March.
    • Handle: RePEc:wly:jmoncb:v:42:y:2010:i:2-3:p:267-287
    DOI: 10.1111/j.1538-4616.2009.00287.x
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    5. Laura Povoledo, 2017. "Modelling the sectoral allocation of labour in open economy models," Canadian Journal of Economics, Canadian Economics Association, vol. 50(3), pages 685-710, August.
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