Openness, the sacrifice ratio, and inflation: Is there a puzzle?

Daniels, Joseph P.; VanHoose, David D.

doi:10.1016/j.jimonfin.2006.09.005

Cited by 42 publications

(38 citation statements)

References 23 publications

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“…Therefore in practice the relationship between openness and the slope of the Phillips curve will depend on whether the e¤ects of the exchange rate on consumer prices and output dominate the microeconomic e¤ects discussed in Razin and Yuen (2002) and Daniels and VanHoose (2003). The results to be presented in this paper support the view that openness increases the slope of the Phillips curve, especially under ‡exible exchange rate conditions.…”

Section: Open Economy Models Of the Phillips Curvesupporting

confidence: 59%

“…the Phillips curve is less steep. Daniels and VanHoose (2003) reach a similar conclusion using a model based on imperfect competition in product and labour markets. In this framework greater openness reduces the income elasticity of spending on domestic goods and therefore weakens the incentive for …rms to raise prices following an output expansion.…”

Section: Open Economy Models Of the Phillips Curvesupporting

confidence: 56%

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Openness, exchange rate regimes and the Phillips curve

Bowdler

2009

Journal of International Money and Finance

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A number of theoretical models predict that the slope of the Phillips curve increases with trade openness, but cross-country studies provide little evidence for such a correlation. We highlight two reasons for this …nding. Firstly, the strength of the relationship may depend on the extent of exchange rate adjustment, which is a potential determinant of output and in ‡ation dynamics in open economies, but previous studies have not made a distinction between …xed and ‡oating exchange rate regimes.Secondly, existing estimates of the Phillips curve slope are based on data from the 1950s through the 1980s, and are therefore likely a¤ected by price and wage controls, in ‡ationary oil price hikes and the role played by …scal policy in driving output and in ‡ation (the underlying theory requires that monetary shocks dominate). We calculate new measures of the Phillips curve slope using data from 1981-98, a period during which these factors were arguably less important. Regressions based on the new measures indicate that the Phillips curve slope increases with trade openness amongst countries maintaining ‡exible and semi- ‡exible exchange rate regimes, but is unrelated to openness amongst countries maintaining …xed exchange rate regimes.

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Section: Open Economy Models Of the Phillips Curvesupporting

confidence: 59%

Section: Open Economy Models Of the Phillips Curvesupporting

confidence: 56%

Openness, exchange rate regimes and the Phillips curve

Bowdler

2009

Journal of International Money and Finance

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“…Two recent models, both exhibiting new Keynesian features such as wage rigidities and imperfect competition, have suggested an explanation for this apparent contradiction. Daniels and VanHoose (2006) embed the standard time inconsistency model in the framework of a multisector, imperfectly competitive open economy model, and show that openness to trade increases the sacrifice ratio but reduces the inflation bias.…”

Section: Introductionmentioning

confidence: 99%

Globalization, the output–inflation tradeoff and inflation

Badinger

2009

European Economic Review

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in FIW -Working PaperGlobalization, the Output-Inflation Tradeoff, and Inflation Harald BadingerThis paper provides a comprehensive assessment of the relation between inflation and globalization, measured in terms of trade and financial openness. Using a large crosssection of 91 countries covering the period 1985-2004, we establish two main empirical regularities. Both higher trade and financial openness i) reduce central bank's inflation bias,yielding lower average inflation, and ii) are associated with a larger output-inflation tradeoff. This evidence is at odds with the standard Barro-Gordon framework, which would require globalization to have a negative effect on the output-inflation tradeoff to yield lower equilibrium inflation, but it is consistent with a recent strand of new Keynesian models emphasizing the role of imperfect competition and wage rigidities. Moreover, our findings do not hold up for the OECD subsample, which suggests that a group of highly developed countries has been successful in creating an institutional framework for central banks that eliminates distortions due to the time inconsistency problem.

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“…Finally, according to Karras (1999), wage indexation discourages soft monetary policies on opening the trade account. Since Lane (1997), imperfect competition and price/wage stickiness have been key ingredients of models intended to explain how both trade and capital openness a¤ect the Phillips curve, such as those proposed by Duca and VanHoose (2000), Daniels and VanHoose (2006, 2013), Loungani, Razin and Yuen (2001), Razin and Yuen (2002) and Razin and Loungani (2005). These models have often produced a negative connection between economic openness and the slope of the Phillips curve.…”

Section: Introductionmentioning

confidence: 99%

“…3 In what follows, we too will employ this expression. Studying a sample of 91 countries from 1985 to 2004, Badinger (2009) provided empirical support for the reasoning underlying Daniels and VanHoose (2006) and Razin and Loungani (2005), but not when focusing on OECD countries only. This debate has been marked by the presence of skeptical contributions as well.…”

Section: Introductionmentioning

confidence: 99%

The price-price Phillips curve in small open economies and monetary unions: theory and empirics

Vaona

2014

Int Econ Econ Policy

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper extends the efficiency wages/partially adaptive expectations Phillips curve, otherwise known as the price-price Phillips curve, from a closed economy context to an open economy one with both commodity trade and capital mobility. We also consider the case of a monetary union (a country) with two member states (regions). The theoretical results are a priori ambiguous. However, in the first place, on resorting to plausible numerical simulations, economic openness increases the reactiveness of inflation to the unemployment rate. In regard to a monetary union, the national unemployment multiplier in the aggregate Phillips curve decreases with the weight of the member state in aggregate employment and increases with that in output. Secondly, we show in two empirical applications that our calibration can provide informative priors for models to be estimated thanks to the Kalman filter. Terms of use: Documents in EconStor may

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Openness, the sacrifice ratio, and inflation: Is there a puzzle?

Cited by 42 publications

References 23 publications

Openness, exchange rate regimes and the Phillips curve

Openness, exchange rate regimes and the Phillips curve

Globalization, the output–inflation tradeoff and inflation

The price-price Phillips curve in small open economies and monetary unions: theory and empirics

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