Inflation dynamics and trade openness

Working paper

Evolving openness to trade is hard to measure, despite its relevance to models of growth, inflation and exchange rates. Our innovative technique measures trade openness encompassing both observable trade policy (tariffs and surcharges) and unobservable trade policy (quotas and other nontariff barriers), capturing the latter by a smooth non-linear stochastic trend in a model for the share of manufactured imports in home demand for manufactured goods, controlling for the business cycle and exchange rate. The evidence for South Africa suggests that increased openness has significantly reduced the mean inflation rate and has reduced the exchange rate pass-through into wholesale prices.

Authors: Aron, J; Muellbauer, J

• Alternative title: with an application to South Africa
• Publication status: Published
• Peer review status: Not peer reviewed
• Series: CSAE working paper series
• Place of publication: http://www.csae.ox.ac.uk/workingpapers/main-wps.html
• Publication date: 2007-01-01
• Edition: Author's Original
• Language: English
• Keywords: trade openness; inflation; JEL: F41; JEL: C22; South Africa; trade policy; JEL: E31; JEL: F13
• Subjects: Econometrics; Africa; Economics; Macro and international economics