Openness and Inflation

Federal Reserve Bank of Dallas Staff Papers, 2007

30 Pages Posted: 8 Jan 2011

See all articles by Mark A. Wynne

Mark A. Wynne

Federal Reserve Bank of Dallas

Erasmus Kersting

Villanova University - Department of Economics

Date Written: July 31, 2007

Abstract

This paper reviews the evidence on the relationship between openness and inflation. There is a robust negative relationship across countries, first documented by Romer (1993), between a country’s openness to trade and its long-run inflation rate. However, a key part of the standard explanation for this relationship - that central banks have a smaller incentive to engineer surprise inflations in more-open economies because the Phillips curve is steeper - seems at odds with the facts. While the United States is still not a very open economy by conventional measures, there are channels through which global developments may influence the nation’s inflation. We document evidence that global resource utilization may play a role in U.S. inflation and suggest avenues for future research.

Keywords: Openness, inflation, globalization, monetary policy

JEL Classification: F4

Suggested Citation

Wynne, Mark A. and Kersting, Erasmus, Openness and Inflation (July 31, 2007). Federal Reserve Bank of Dallas Staff Papers, 2007, Available at SSRN: https://ssrn.com/abstract=1734935

Mark A. Wynne (Contact Author)

Federal Reserve Bank of Dallas ( email )

PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5159 (Phone)
214-922-5194 (Fax)

Erasmus Kersting

Villanova University - Department of Economics ( email )

Villanova, PA 19085
United States

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