Openness and Inflation: Theory and Evidence / David Romer.

By:

Romer, David

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w3936.Publication details: Cambridge, Mass. National Bureau of Economic Research 1991.Description: 1 online resource: illustrations (black and white)Subject(s):

Online resources:

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Abstract: This paper points out and tests a straight forward but previously unnoticed prediction of models in which the absence of precommitment in monetary policy leads to excessive inflation. Because unanticipated monetary expansion leads to real exchange rate depreciation, and because the harms of real depreciation are greater in more open economies, the benefits of surprise expansion are decreasing in the degree of openness. Thus, under discretionary policy-making, money growth and inflation will be lower in more open economies. After presenting a simple theoretical model demonstrating this prediction of the theory, the paper examines the link between openness and inflation using cross-country data. The data reveal a strong negative link between openness and inflation.

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Working Paper	Biblioteca Digital	Colección NBER	nber w3936 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w3933 Local House Price Indexes: 1982-1991 /	nber w3934 Anatomy of a Financial Crisis /	nber w3935 Errors in Output Deflators Revisited: Unit Values and the PPI /	nber w3936 Openness and Inflation: Theory and Evidence /	nber w3937 Revisions and Investment Plans and the Stock Market Rate of Return /	nber w3938 Individual Retirement Accounts: A Review of the Evidence /	nber w3939 The Structure of Production, Technical Change and Efficiency in a Multiproduct Industry: An Application to U.S. Airlines /	Next

December 1991.

This paper points out and tests a straight forward but previously unnoticed prediction of models in which the absence of precommitment in monetary policy leads to excessive inflation. Because unanticipated monetary expansion leads to real exchange rate depreciation, and because the harms of real depreciation are greater in more open economies, the benefits of surprise expansion are decreasing in the degree of openness. Thus, under discretionary policy-making, money growth and inflation will be lower in more open economies. After presenting a simple theoretical model demonstrating this prediction of the theory, the paper examines the link between openness and inflation using cross-country data. The data reveal a strong negative link between openness and inflation.