Openness and Inflation

Dudley Cooke

Economics Discussion Papers from University of Essex, Department of Economics

Abstract: A general equilibrium model of a small open economy is developed to analyse the optimal rate of inflation under discretion. Once agents' welfare is the sole policy objective it is possible to show that openness and inflation no longer have a simple inverse relationship. A greater degree of openness may lead the policy maker to want to exploit the short-run Phillips curve more aggressively, even if involves a smaller short-run benefit, because changes in export demand affect the terms of trade. Inflation can then be higher in a more open economy.

Keywords: Inflation bias; terms of trade; export demand; small open economy. (search for similar items in EconPapers)
Date: 2006
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