Openness and inflation volatility: cross-country evidence.

Working paper

Trade openness can affect inflation volatility via the incentives faced by policymakers or the structure of production and consumption, but the sign of this effect, as predicted from economic theory, is ambiguous. This paper provides evidence for a negative effect of openness on inflation volatility using a dynamic panel model that controls for the endogeneity of openness and the effects of both average inflation and the exchange rate regime. Our results offer one explanation for the recent decline in inflation volatility observed in many countries. The relationship is shown to be strongest amongst developing and emerging market economies, and we argue that the mechanisms linking openness and inflation volatility are likely to be strongest amongst this group of countries. Keywords:

Authors: Bowdler, C; Malik, A

• Publisher: CSAE (University of Oxford)
• Series: Working Paper Series
• Publication date: 2005-01-01
• Language: English