Openness, the Sacrifice Ratio, and Inflation: Is there a Puzzle?

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Date
2005-08-13Author
Daniels, Joseph P.
VanHoose, David D.
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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. (forthcoming) 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.