Reconciling inflation with openness

Openness and Inflation∗

A general equilibrium model of a small open economy is developed to analyze the optimal rate of inflation under discretion. Once agents’ welfare is the sole policy objective it is possible to show that openness and inflation no longer have a simple inverse relationship. A greater degree of openness may lead the policy maker to want to exploit the short-run Phillips curve more aggressively, even...

Does Capital Account Openness Lower Inflation?

Openness and Inflation: Theory and Evidence*

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 unanticipated expansion are decreasing in the degree of openness. Models in which the absence of precommitment in monetary policy leads to excessive inflation therefore predict lower average inflation in more open econo...

Openness and inflation volatility: Panel data evidence

Trade openness can reduce inflation volatility through limiting recourse to seigniorage during periods of temporary fiscal deficits, and by shifting consumption and production towards goods for which the terms of trade are relatively stable. This paper provides evidence for a negative effect of openness on inflation volatility using a dynamic panel model that controls for the endogeneity of ope...

Technical Appendix: Transition to FDI Openness - Reconciling Theory and Evidence

* The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.