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.
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Recommended Citation
Daniels, Joseph P. and VanHoose, David D., "Openness, the Sacrifice Ratio, and Inflation: Is There a Puzzle?" (2006). Economics Faculty Research and Publications. 6.
https://epublications.marquette.edu/econ_fac/6
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.