Openness and Inflation

Mark A. Wynne · Erasmus Kersting

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Monetary Policy and Economic Impact Global trade and economics Global Financial Crisis and Policies

Abstract

This paper reviews the evidence on the relationship between openness and inflation. There is a robust negative relationship across countries, first documented by Romer (1993), between a country’s openness to trade and its long-run inflation rate. However, a key part of the standard explanation for this relationship - that central banks have a smaller incentive to engineer surprise inflations in more-open economies because the Phillips curve is steeper - seems at odds with the facts. While the United States is still not a very open economy by conventional measures, there are channels through which global developments may influence the nation’s inflation. We document evidence that global resource utilization may play a role in U.S. inflation and suggest avenues for future research.

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References

2005INTEREST AND PRICES: FOUNDATIONS OF A THEORY OF MONETARY POLICY 1983A Positive Theory of Monetary Policy in a Natural Rate Model 1990Credible Disinflation with Staggered Price Setting 2006People Flows in Globalization 2003LARGE DEVALUATIONS AND THE REAL EXCHANGE RATE 2001Implications of Globalization for Monetary Policy

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