A note on Romer’s openness-inflation relation: the responsiveness of AS and AD to economic openness and monetary policy
نویسندگان
چکیده
Temple (2002) empirically challenges Romer’s (1993) negative opennessinflation relation on empirical grounds. This article links economic openness to the slopes of aggregate supply (AS) and aggregate demand (AD) to explain why the openness-inflation relation can be ambiguous. Starting with a widely used assumption initiated by Romer (1993) that more open economies face greater output inflation tradeoffs, we demonstrate that greater output-inflation tradeoffs in more open economies (reflected in the steeper AS) induce policymakers to adopt more aggressive optimal monetary policy (reflected in the flatter AD). Empirical results from 15 developed countries’ data support our theoretical explanation on the recent empirical failure in finding the negative openness-inflation relation.
منابع مشابه
The Effect of Financial Globalization on Monetary Policy Discipline: The Evidence from 22 Developing Countries
The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years. There seems to be a consensus that financial globalization has had a "discipline effect" on monetary policy, because it has reduced the returns from using monetary policy to stabilize the output. As a result, monetary policy over recent years has placed more emphasis o...
متن کاملThe Effects of Openness and Globalization on Inflation: An ARDL Bounds Test Approach
Abstract The purpose of this paper is to test the hypothesis first proposed by Romer (1993); suggesting that inflation is lower in more open economies. According to this hypothesis, central banks have a lower incentive to engineer surprise inflations in more-open economies because the Phillips curve is steeper. Furthermore, Comparing with other empirical studies, this paper has used the new KOF...
متن کاملDeterminants of the Choice of Exchange Rate Regimes in OIC Countries
Several political and economic factors are involved in choosing exchange rate policy in Organization of Islamic Cooperation (OIC) countries. In the present study, these factors have been investigated with an emphasis on OCA and political economic factors during 1990 -2014. The result shows that OCA and political economic factors as well as tradable sector are influential on exchange rate poli...
متن کاملWhat Explains Recent Changes in International Monetary Policy Attitudes toward Inflation? Evidence from Developed Countries MELODY LO Department of Economics, College of Business, University of Texas at San Antonio, USA
Since Alogoskoufis and Smith (AER, 1991), several studies have stated that there are seemingly universal shifts in monetary policy attitudes toward inflation. However, no coherent empirical evidence is yet provided either to confirm whether there were universal monetary policy regime shifts or to explain what fundamentals may drive such shifts. Using long time series data from a group of 18 dev...
متن کاملThe Effect of Financial Openness Measure on the Government Size in Selected Countries
decline in private sector investment expenditures, crowding-out effect, lack of conditions for optimal allocation of resources, reduction inefficiency, and the possibility of increasing inequality in income distribution are considered as the effects of increasing the government size according to many theoretical studies and empirical evidence. Hence, identifying the determinants of the governm...
متن کامل