Globalization and Disinflation: The Efficiency Channel

Assaf Razin and Prakash Loungani

No 4895, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The paper analyses how globalization forces induce monetary authorities, guided in their policies by the welfare criterion of a representative household, to put greater emphasis on reducing the inflation rate than on narrowing the output gaps. We demonstrate that the marginal rate of substitution between the output gap and the inflation (at a constant value of the utility-based loss function) rises when the economy is opening up to international trade in goods, and is integrated to the world capital markets. We associate the marginal rate of substitution with the sacrifice ratio, and provide evidence on trade and capital openness effects on inflation, through the efficiency channel.

Keywords: Trade openness; Capital-account openness; Utility-based loss function (search for similar items in EconPapers)
JEL-codes: E50 F40 (search for similar items in EconPapers)
Date: 2005-02
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (6)

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