Capital Mobility and the Output-Inflation Tradeoff
A common feature for developing countries that have experienced a sharp drop in inflation without large output losses is the extensive use of capital controls. This study shows that capital controls significantly improve the sacrifice ratio. This element contributes to the explanation of small output losses during disinflations, in addition to the high inflation mean and large nominal output variability in the pre-stabilization phase. A useful concept for disinflation episodes is the sacrifice ratio; the percentage decline in the rate of unemployment with 1% fall in the rate of inflation. The lower this ratio the less painful is disinflation. The new classical approach, pioneered by Lucas (1973), emphasized the variability of nominal GNP growth as a main determinant of the trade-off. The argument is based on the real-nominal confusion of price and output setters, so that agents will be more likely to treat shocks as nominal when the variability of nominal GNP increases. In contrast, the new Keynesian approach, as in Ball, Mankiw and Romer (1988), emphasized the menu costs determinants of the trade-off. That is, in the presence of fixed costs of changing prices, the Phillips curve is expected to be steeper, the higher is the expected rate of inflation, since with higher expected inflation and more frequent price changes, nominal shocks will have smaller real effects.
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Mar 1997|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
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.:
- DeFina, Robert H, 1991. "International Evidence on a New Keynesian Theory of the Output-Inflation Trade-Off," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 410-22, August.
- Romer, David, 1993.
"Openness and Inflation: Theory and Evidence,"
The Quarterly Journal of Economics,
MIT Press, vol. 108(4), pages 869-903, November.
- Laurence Ball, 1994.
"What Determines the Sacrifice Ratio?,"
in: Monetary Policy, pages 155-193
National Bureau of Economic Research, Inc.
- Jeffrey D. Sachs & Andrew Warner, 1995.
"Economic Reform and the Process of Global Integration,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
- Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
- Alberro, Jose, 1981. "The Lucas hypothesis on the Phillips Curve : Further international evidence," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 239-250.
- Leonardo Bartolini & Allan Drazen, 1996.
"When Liberal Policies Reflect External Shocks, What Do We Learn?,"
NBER Working Papers
5727, National Bureau of Economic Research, Inc.
- Bartolini, Leonardo & Drazen, Allan, 1997. "When liberal policies reflect external shocks, what do we learn?," Journal of International Economics, Elsevier, vol. 42(3-4), pages 249-273, May.
- Leonardo Bartolini & Allan Drazen, 1996. "When liberal policies reflect external shocks, what do we learn?," Staff Reports 18, Federal Reserve Bank of New York.
- Papell, D.H., 1988.
"Expectations And Exchange Rate Dynamics After A Decade Of Floating,"
9, Houston - Department of Economics.
- Papell, David H., 1988. "Expectations and exchange rate dynamics after a decade of floating," Journal of International Economics, Elsevier, vol. 25(3-4), pages 303-317, November.
- Vittorio Grilli & Gian Maria Milesi-Ferretti, 1995.
"Economic Effects and Structural Determinants of Capital Controls,"
IMF Staff Papers,
Palgrave Macmillan, vol. 42(3), pages 517-551, September.
- Vittorio Grilli & Gian-Maria Milesi-Ferretti, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Working Papers 95/31, International Monetary Fund.
- Kormendi, Roger C & Meguire, Philip G, 1984. "Cross-Regime Evidence of Macroeconomic Rationality," Journal of Political Economy, University of Chicago Press, vol. 92(5), pages 875-908, October.
- Assaf Razin & Andrew Rose, 1992. "Business Cycle Volatility and Openness: An Exploratory Cross-Section Analysis," NBER Working Papers 4208, National Bureau of Economic Research, Inc.
- Davide Fiaschi, 1996. "Fiscal policies and growth," Working Papers 261, Dipartimento Scienze Economiche, Universita' di Bologna.
- Frenkel, Jacob & razin, assaf & Yuen, chi-wa, 1996.
"Fiscal policies and growth in the world economy,"
22109, University Library of Munich, Germany.
- Beggs, John J, 1988. "Diagnostic Testing in Applied Econometrics," The Economic Record, The Economic Society of Australia, vol. 64(185), pages 81-101, June.
- Addison, John T. & Chappell, Henry Jr. & Castro, Alberto C., 1986. "Output-inflation tradeoffs in 34 countries," Journal of Economics and Business, Elsevier, vol. 38(4), pages 353-360, December.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:1577. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.