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Exchange-Rate Pass Through, Openness, Inflation, and the Sacrifice Ratio

Joseph Daniels and David VanHoose

No 901, Working Papers and Research from Marquette University, Center for Global and Economic Studies and Department of Economics

Abstract: Considerable recent work has reached mixed conclusions about whether and how globalization affects the inflation-output trade-off and realized inflation rates. In this paper, we utilize cross-country data to provide evidence of interacting effects between a greater extent of exchange-rate pass through and openness to international trade as factors that we find both contribute to lower inflation. The interplay between the inflation effects of pass through and openness suggest that both factors may influence the terms of the output-inflation trade-off. We develop a simple theoretical model showing how both pass through and openness can interact to influence the sacrifice ratio, and we empirically explore the nature of the interplay between the two variables as factors influencing the sacrifice ratio. Our results indicate that a greater extent of pass through depresses the sacrifice ratio and that once the extent of pass through is taken into account alongside other factors that affect the sacrifice ratio, the degree of openness to international trade exerts an empirically ambiguous effect on the sacrifice ratio.

Keywords: Pass Through; Openness; Sacrifice Ratio (search for similar items in EconPapers)
JEL-codes: F40 F41 F43 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2009-09
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
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http://www.busadm.mu.edu/mrq/workingpapers/wpaper0901.pdf First Version, 2008 Second Version, 2009 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:mrq:wpaper:0901

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