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Is openness inflationary? Imperfect competition and monetary market power

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  • Richard W. Evans

Abstract

Much empirical work has documented a negative correlation between different measures of globalization or openness and inflation levels across countries and across time. However, there is much less work exploring this relationship through structural international models based on explicit microeconomic foundations. This paper asks the question of how the degree of openness of an economy affects the equilibrium inflation level in a simple two-country OLG model with imperfect competition in which the monetary authority in each country chooses the money growth rate to maximize the welfare of its citizens. I find that a higher degree of openness in a country is associated with a higher equilibrium inflation rate. ; This result is driven by the fact that the monetary authority enjoys a degree of monopoly power in international markets as Foreign consumers have some degree of inelasticity in their demand for goods produced in the Home country. The decision of the monetary authority is then to balance the benefits of increased money growth that come from the open economy setting with the well-known consumption tax costs of inflation. In addition, I find that the level of imperfect competition among producers within a country is a perfect substitute for the international market power of the monetary authority in extracting the monopoly rents available in this international structure.

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  • Richard W. Evans, 2007. "Is openness inflationary? Imperfect competition and monetary market power," Globalization and Monetary Policy Institute Working Paper 01, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:01
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    1. repec:pje:journl:article14sumi is not listed on IDEAS
    2. repec:fip:feddgm:00014 is not listed on IDEAS
    3. Jafari Samimi, Ahmad & Ghaderi, Saman & Hosseinzadeh, Ramezan & Nademi, Younes, 2012. "Openness and inflation: New empirical panel data evidence," Economics Letters, Elsevier, vol. 117(3), pages 573-577.
    4. Aram Sepehrivand & Jabar Azizi, 2016. "The Effect of Trade Openness on Inflation in D-8 Member Countries with an Emphasis on Romer Theory," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 4(4), pages 162-167, December.
    5. Enrique Martinez-Garcia & Mark A. Wynne, 2010. "The global slack hypothesis," Staff Papers, Federal Reserve Bank of Dallas, issue Sep.
    6. Wynne, Mark A., 2008. "First steps: developing a research agenda on globalization and monetary policy," Annual Report, Globalization and Monetary Policy Institute, Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute, pages 4-13.

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    Keywords

    Globalization ; Equilibrium (Economics);

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