Document Type
Article
Publication Date
12-2006
Source Publication
Journal of International Money and Finance
Abstract
The standard time-inconsistency-based explanation for the negative correlation between openness and inflation requires an inverse relationship between the sacrifice ratio and openness, but Daniels et al. (2005, Openness, central bank independence, and the sacrifice ratio. Journal of Money, Credit, and Banking 37 (2), 371–379.) have provided evidence that controlling for central bank independence reveals a positive relationship. This paper embeds the time-inconsistency approach within a model of a multisector, imperfectly competitive, open economy. In this setting, greater openness raises the sacrifice ratio but reduces the inflation bias. Thus, failure to observe an inverse relationship between openness and the sacrifice ratio does not necessarily imply that the time-inconsistency approach is irrelevant to understanding the openness–inflation relationship.
Comments
Originally published in Journal of International Money and Finance, Volume 25, No. 8 (December 2006).
The article was origianlly published by Elsevier. For more information about accessing the definitive published version of this article, consult the journal home page at: http://www.elsevier.com/wps/find/journaldescription.cws_home/30443/description#description