Openness and Inflation
Federal Reserve Bank of Dallas Staff Papers, 2007
30 Pages Posted: 8 Jan 2011
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: Suggested Citation
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