Openness and the Output-Inflation Tradeoff

Standard open economy models predict that openness to trade should exert a positive effect on the slope of the output-inflation tradeoff, or Phillips curve, but such a proposition finds very little support in the existing empirical literature. We propose a new test of this hypothesis based on new measures of the slope of the Phillips curve and more general cross-country regression models. The results provide strong empirical support for the standard theoretical prediction.Openness, Inflation, Phillips curve

Openness and inflation volatility: cross-country evidence

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 endogenity of openness, and the average rate of inflation. We conduct a battery of robuistness 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 thanin OECD countires. We also identify potential channels underpinning this relationship. In particulare, we provide eveidenc that openness may promote inflation stability through dampening monetary and terms of trade shocks.Openness, inflation, globalization, volatility, panel data

A note on the determinants of inflation starts in the OECD

Boschen and Weise (Journal of Money, Credit and Banking, (2003)) model the probability of a large upturn in inflation. We extend their work to show that openness to trade exerts a negative effect on the probability of such an event.Inflation starts, trade openness.

Inflation Adjustment and Labour Market Structures: Evidence from a Multi-country Study..

The impact of labour market structures on the response of inflation to macroeconomic shocks is analysed empirically. Results based on a 20-country panel show that if labour market coordination is high, the effect on inflation of movements in unemployment, import prices, tax rates and productivity is dampened, both on impact and dynamically. In contrast, monopoly power in labour supply, measured by the percentage unionisation of the workforce, appears to amplify the response of inflation to its reduced-form determinants. These findings are attributed to the behaviour of wages following movements in demand-and supply-side conditions.

The Open Economy Consequences of U.S. Monetary Policy

We characterize the channels by which a failure to distinguish intended/unintended and anticipated/unanticipated monetary policy may lead to attenuation bias in monetary policy's open economy effects. Using a U.S. monetary policy measure which isolates the intended and unanticipated component of federal funds rate changes, we quantify the magnitude of the attenuation bias for the exchange rate and foreign variables, finding it to be substantial. The exchange rate appreciation following a monetary contraction is up to 4 times larger than a recursively-identified VAR estimate. There is stronger evidence of foreign interest rate pass-through. The expenditure-reducing effects of a U.S. monetary policy contraction dominate any expenditure-switching effects, leading to a positive conditional correlation of international outputs and prices.

Testing for a time-varying price-cost markup in the Euro area inlation process

Empirical models of inflation often incorporate equilibrium correction effects based upon levels of prices and input costs. Such models assume that the steady-state price-cost markup is constant, but recent research suggests that this may not be true for the Euro area economy, which has undergone major structural reforms over the last 25 years. We allow for permanent shifts in the markup factor through estimating an inflation equation that includes a time-varying intercept. The model suggests that a reduction in the markup contributed to disinflation in the Euro area during the period 1981-2000.inflation, price-cost markup, cointegration, time-varying intercept, dynamic modelling.