Document Type

Article

Language

eng

Format of Original

12 p.

Publication Date

12-2006

Publisher

Elsevier

Source Publication

Journal of International Money and Finance

Source ISSN

0261-5606

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

Accepted version. Journal of International Money and Finance, Vol. 25, No. 8 (December 2006): 1336-1347. DOI. Published under Creative Commons license Attribution-NonCommercial-NoDerivatives 4.0 International.

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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Economics Commons

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