TY  - JOUR
AU  - Romer,David
TI  - Openness and Inflation: Theory and Evidence
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3936
PY  - 1991
Y2  - December 1991
UR  - http://www.nber.org/papers/w3936
L1  - http://www.nber.org/papers/w3936.pdf
N1  - Author contact info:
David H. Romer
Department of Economics
University of California, Berkeley
Berkeley, CA 94720-3880
E-Mail: dromer@econ.berkeley.edu
AB  - This paper points out and tests a straight forward but previously unnoticed prediction of models in which the absence of precommitment in monetary policy leads to excessive inflation. Because unanticipated monetary expansion leads to real exchange rate depreciation, and because the harms of real depreciation are greater in more open economies, the benefits of surprise expansion are decreasing in the degree of openness. Thus, under discretionary policy-making, money growth and inflation will be lower in more open economies. After presenting a simple theoretical model demonstrating this prediction of the theory, the paper examines the link between openness and inflation using cross-country data. The data reveal a strong negative link between openness and inflation.
ER  -