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Openness and inflation volatility: Cross-country evidence

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Abstract

Recent decades have seen a considerable expansion of global trade and a simultaneous decline in inflation volatility. This paper investigates whether greater openness to trade helps achieve inflation stability. Using panel data for a sample of developing and industrial countries over the period 1961-2000, we document a negative and statistically significant effect of openness on inflation volatility. This relationship is estimated after controlling for the potential endogeneity of openness, and the average rate of inflation. We conduct a battery of robustness tests, showing in particular the robustness of our conclusions to controlling for the choice of exchange rate regime. A sub-sample analysis suggests that the relationship between openness and inflation volatility is more pronounced in developing and emerging market economies than in OECD countries. We also identify potential channels underpinning this relationship. In particular, we provide evidence that openness may promote inflation stability through dampening monetary and terms of trade shocks.

Suggested Citation

  • Christopher Bowdler & Adeel Malik, 2005. "Openness and inflation volatility: Cross-country evidence," Economics Papers 2005-W14, Economics Group, Nuffield College, University of Oxford.
  • Handle: RePEc:nuf:econwp:0514
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    Cited by:

    1. Horst Feldmann, 2012. "Inflation volatility and unemployment in industrial countries," Applied Economics, Taylor & Francis Journals, vol. 44(1), pages 49-64, January.
    2. Rafael Portillo & Luis-Felipe Zanna & Stephen O’Connell & Richard Peck, 2016. "Implications of food subsistence for monetary policy and inflation," Oxford Economic Papers, Oxford University Press, vol. 68(3), pages 782-810.
    3. Florence Barugahara, 2015. "The Impact of Political Instability on Inflation Volatility in Africa," South African Journal of Economics, Economic Society of South Africa, vol. 83(1), pages 56-73, March.
    4. Anand, Rahul & Prasad, Eswar S. & Zhang, Boyang, 2015. "What measure of inflation should a developing country central bank target?," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 102-116.
    5. Aliyev, Khatai & Gasimov, Ilkin, 2014. "Openness-Inflation Nexus in South Caucasus Economies," MPRA Paper 62761, University Library of Munich, Germany.
    6. Qureshi, Irfan, 2015. "Monetary Policy Shifts and Central Bank Independence," MPRA Paper 81646, University Library of Munich, Germany, revised Sep 2017.
    7. Esteban Colla De Robertis, 2010. "Monetary Committee Size and Special Interest Influence," Documentos de Investigación - Research Papers 2, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    8. Ummad Mazhar & Cheick Kader M'baye, 2014. "Does Forecasts Transparency Affect Macroeconomic Volatility in Developing Countries ? Evidence From Quasi-Natural Experiments," Working Papers 1410, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    9. repec:spr:portec:v:16:y:2017:i:3:d:10.1007_s10258-017-0129-x is not listed on IDEAS
    10. Gernot Pehnelt, 2007. "Globalisation and Inflation in OECD Countries," Jena Economic Research Papers 2007-055, Friedrich-Schiller-University Jena.
    11. Oseni Isiaq Olasunkanmi & Sanni Hauwa Yetunde, 2016. "Does Fiscal Deficit Granger Cause Impulsiveness in Inflation Rate in Nigeria?," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 12(4), pages 208-216, October.
    12. Sikdar, Asaduzzaman & Kundu, Nobinkhor & Khan, Zakir Saadullah, 2013. "Trade openness and inflation: A test of Romer hypothesis for Bangladesh," MPRA Paper 65244, University Library of Munich, Germany, revised 16 Oct 2013.
    13. Mazhar, Ummad & Jafri, Juvaria, 2014. "Does an informal sector reduce the economic dividends of political stability? Empirical evidence," MPRA Paper 60764, University Library of Munich, Germany.
    14. Carlos Esteban Posada & Camilo Morales J., 2007. "Inflación y apertura: evidencia para Colombia (1980-2005)," BORRADORES DE ECONOMIA 004286, BANCO DE LA REPÚBLICA.

    More about this item

    Keywords

    Openness; inflation; globalization; volatility; panel data.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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