Inflation Dynamics and Trade Openness

44 Pages Posted: 28 May 2008  

Janine Aron

University of Oxford - Department of Economics

John Muellbauer

University of Oxford - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: June 2007

Abstract

It is difficult to obtain reliable measures of evolving openness to trade, 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), and such factors as capital controls, sanctions and dual exchange rates (often used in composite trade measures). The share of manufactured imports in home demand for manufactured goods is estimated in STAMP (Koopman et al., 2000) using measured trade policy and controlling for fluctuations in domestic demand, relative prices of imports and the exchange rate. The unmeasured trade policy component is captured by a smooth non-linear stochastic trend. The two elements of openness, the stochastic trend and the rates of tariffs and surcharges, are included in a model of wholesale price inflation in South Africa. The evidence suggests that increased openness has significantly reduced the mean inflation rate and has reduced the exchange rate pass-through into wholesale prices.

Keywords: Inflation dynamics, modelling inflation, trade openness

JEL Classification: C22, E31, F13, F41

Suggested Citation

Aron, Janine and Muellbauer, John, Inflation Dynamics and Trade Openness (June 2007). , Vol. , pp. -, 2007. Available at SSRN: https://ssrn.com/abstract=1136672

Janine Aron (Contact Author)

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom
+44 1865 271 084 (Phone)
+44 1865 271 094 (Fax)

John Muellbauer

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom
+44 1865 278 583 (Phone)
+44 1865 278 557 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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