Openness and inflation volatility: Cross-country evidence

Christopher Bowdler () and Adeel Malik ()
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Adeel Malik: Centre for the Study of African Economies, University of Oxford

No 2005-W14, Economics Papers from Economics Group, Nuffield College, University of Oxford

Abstract: Recent decades have seen a considerable expansion of global trade and a simultaneous decline in inflation volatility. This paper investigates whether greater openness to trade helps achieve inflation stability. Using panel data for a sample of developing and industrial countries over the period 1961-2000, we document a negative and statistically significant effect of openness on inflation volatility. This relationship is estimated after controlling for the potential endogeneity of openness, and the average rate of inflation. We conduct a battery of robustness tests, showing in particular the robustness of our conclusions to controlling for the choice of exchange rate regime. A sub-sample analysis suggests that the relationship between openness and inflation volatility is more pronounced in developing and emerging market economies than in OECD countries. We also identify potential channels underpinning this relationship. In particular, we provide evidence that openness may promote inflation stability through dampening monetary and terms of trade shocks.

Keywords: Openness; inflation; globalization; volatility; panel data. (search for similar items in EconPapers)
JEL-codes: E31 F41 O57 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2005-03-15
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-int, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Working Paper: Openness and inflation volatility: cross-country evidence (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:nuf:econwp:0514

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