Globalization and Inflation-Output Tradeoffs
We demonstrate how capital account and trade account liberalizations help reduce inefficiencies associated with the fluctuations in the output gap, relative to the inefficiencies associated with the fluctuations in inflation. With capital account liberalization the representative household is able to smooth fluctuations in consumption, and thus becomes relatively insensitive to fluctuations in the output gap. With trade liberalization the economy tends to specialize in production but not in consumption. The correlation between fluctuations in the output gap and aggregate consumption is therefore weakened by trade openness; hence a smaller weight on the output gap in the utility-based loss function, compared to the closed economy situations.A key implication of the theory is that globalization forces could induce monetary authorities, to put a greater emphasis on reducing the inflation rate than on narrowing the output gaps. We provide a re- interpretation of the evidence on the effect of openness on the sacrifice ratio which supports the prediction of the theory.
|Date of creation:||Sep 2005|
|Publication status:||published as NBER International Macro Annual, MIT Press, May 2007.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
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.:
- Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
- Loungani, Prakash & Razin, Assaf & Yuen, Chi-Wa, 2001.
"Capital mobility and the output-inflation tradeoff,"
Journal of Development Economics,
Elsevier, vol. 64(1), pages 255-274, February.
- Loungani, P. & Eazin, A. & Yuen, C.W., 1996. "Capital Mobility and the Output-Inflation Tradeoff," Papers 38-96, Tel Aviv.
- Prakash Loungani & Assaf Razin & Chi-Wa Yuen, 1997. "Capital mobility and the output-inflation tradeoff," International Finance Discussion Papers 577, Board of Governors of the Federal Reserve System (U.S.).
- 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.
- Assaf Razin & Prakash Loungani & Chi-Wa Yuen, 2000. "Capital Mobility and the Output-Inflation Tradeoff," IMF Working Papers 00/87, International Monetary Fund.
- Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
- Temple, Jonathan, 2002. "Openness, Inflation, and the Phillips Curve: A Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 450-468, May.
- Luca Benati, 2003. "Evolving Post-World War II U.K. Economic Performance," Computing in Economics and Finance 2003 171, Society for Computational Economics.
- Luca Benati, 2004. "Evolving post-World War II UK economic performance," Bank of England working papers 232, Bank of England.
- Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 743-764.
- Daniels, Joseph P & Nourzad, Farrokh & Vanhoose, David D, 2005. "Openness, Central Bank Independence, and the Sacrifice Ratio," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 371-379, April.
- Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, vol. 42(3-4), pages 327-347, May.
- De Paoli, Bianca, 2009. "Monetary policy and welfare in a small open economy," Journal of International Economics, Elsevier, vol. 77(1), pages 11-22, February.
- Bianca De Paoli, 2004. "Monetary Policy and Welfare in a Small Open Economy," CEP Discussion Papers dp0639, Centre for Economic Performance, LSE.
- Bianca De Paoli, 2004. "Monetary policy and welfare in a small open economy," LSE Research Online Documents on Economics 19950, London School of Economics and Political Science, LSE Library.
- David Romer, 1998. "A New Assessment of Openness and Inflation: Reply," The Quarterly Journal of Economics, Oxford University Press, vol. 113(2), pages 649-652.
- David Romer, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 869-903.
- David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
- David Romer, 1991. "Openness and Inflation: Theory and Evidence," NBER Working Papers 3936, National Bureau of Economic Research, Inc.
- Chen, Natalie & Imbs, Jean & Scott, Andrew, 2004. "Competition, Globalization and the Decline of Inflation," CEPR Discussion Papers 4695, C.E.P.R. Discussion Papers.
- 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.
- Richard N. Cooper, 1999. "Should Capital Controls be Banished?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 89-142. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:11641. 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: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.