The Openness-Inflation Puzzle
Posted: 6 Nov 1998
Date Written: August 27, 1998
Recent papers have documented a robust negative correlation between openness to trade and average inflation. The usual argument is that openness makes the Phillips curve steeper, leading to a lower rate of inflation in equilibrium. The relationship between openness and inflation is then seen as evidence in favor of time consistency theories of monetary policy. However, in this note I show that standard measures of the output-inflation trade-off are not correlated with openness. Hence the usual argument is almost certainly wrong, and the observed link between openness and inflation becomes an interesting puzzle.
JEL Classification: E31, F41
Suggested Citation: Suggested Citation