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Openness-inflation Nexus in alternative monetary regimes

Lin Pei-Chien (), Huang Ho-Chuan () and Liu Xiaojian ()
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Lin Pei-Chien: Department of Industrial Economics, Tamkang University, Taiwan25137, ROC
Huang Ho-Chuan: Department of Banking and Finance, Tamkang University, Taiwan25137, ROC
Liu Xiaojian: College of Finance and Statistics, Hunan University, Changsha410079, China

Studies in Nonlinear Dynamics & Econometrics, 2022, vol. 26, issue 1, 35-53

Abstract: By applying an endogenous switching regression model to a sample of 64 countries, this article explores whether the effect of trade openness on inflation is influenced by the adoption of inflation targeting (IT). The outcome indicates that, while there exists a significant and negative impact of trade openness on inflation in the non-IT countries with flexible exchange rate system, the effect is negligible in the IT economies. In addition, the above differential inflation effect of trade openness across IT and non-IT regimes is only present in the developing subsample with flexible exchange rate system, but not the developed counterpart. Moreover, apart from trade openness, financial openness reinforces inflation in those developing countries not adopting IT, whereas no such significant effect is found in developing countries adopting IT. Instead of inflation, further results show that trade openness lowers inflation volatility both in developing and developed countries not adopting IT, yet the impact is smaller in developed country group. However, no such statistically significant link is found in developing and developed countries that adopt IT.

Keywords: endogenous switching regression model; financial openness; inflation; inflation targeting; inflation volatility; trade openness; F41; E31; E42; C30 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1515/snde-2018-0052

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