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Inflation dynamics and trade openness: with an application to South Africa

  • Janine Aron
  • John Muellbauer

Evolving openness to trade is hard to measure, despite its relevance to models of growth, inflation and exchange rates. Our innovative technique measures trade openness encompassing both observable trade policy (tariffs and surcharges) and unobservable trade policy (quotas and other non-tariff barriers), capturing the latter by a smooth non-linear stochastic trend in a model for the share of manufactured imports in home demand for manufactured goods, controlling for the business cycle and exchange rate. The evidence for South Africa suggests that increased openness has significantly reduced the mean inflation rate and has reduced the exchange rate pass-through into wholesale prices.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/2007-11.

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Date of creation: 01 Jun 2007
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Handle: RePEc:oxf:wpaper:wps/2007-11
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