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

Date

January 8, 2003, Revised May 24, 2004

Authors

Daniels, Joseph P.
VanHoose, David D.

Access rights

Journal Title

Journal ISSN

Volume Title

Publisher

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. (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.

Description

Keywords

Open Economy Macroeconomics, JEL Classification: F41

Citation