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Financial Openness and Inflation: Recent Evidence 

Author

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  • Alfred V Guender
  • Hamish McHugh-Smith

Abstract

In a model comprising a bank and goods-producing firm, this paper advances the hypothesis that financial openness should be inversely related to the rate of inflation. Our empirical analysis reveals a strong and robust inverse link between financial openness and CPI inflation in over 100 countries over the 1997-2016 period, adding weight to the argument that inflation in financially open economies is indeed lower. This result obtains for OECD countries as well as non-OECD countries. Trade openness in contrast bears no systematic relationship to inflation.

Suggested Citation

  • Alfred V Guender & Hamish McHugh-Smith, 2023. "Financial Openness and Inflation: Recent Evidence ," CAMA Working Papers 2023-02, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2023-02
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2023-01/2_2023_guender_mchugh-smith.pdf
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    More about this item

    Keywords

    Financial Openness; Trade Openness; Inflation; Bank Loans; Deposits; Nominal Price Rigidity;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance

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