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Openness and Inflation Volatility: Panel Data Evidence
Abstract
Trade openness can affect inflation volatility via the incentives faced by policy-makers or the structure of production and consumption, but the sign of this effect, as predicted from economic theory, is ambiguous. This paper provides evidence for a negative effect of openness on inflation volatility using a dynamic panel model that controls for the endogeneity of openness and the effects of both average inflation and the exchange rate regime. Our results offer one explanation for the recent decline in inflation volatility observed in many countries. The relationship is shown to be strongest amongst developing and emerging market economies, and we argue that the mechanisms linking openness and inflation volatility are likely to be strongest amongst this group of countries.
... Trade openness is a concept that refers to a country's ability to import and export goods and services to other countries (Baunsgaard & Keen, 2010). This type of openness allows countries to take advantage of their comparative advantages by exporting goods and services that they can produce efficiently and importing goods and services that they can produce less efficiently (Bowdler & Malik, 2017). This results in lower prices for consumers, an increase in real income and an overall increase in consumer and producer welfare. ...
... While all five countries are members of the WTO, they have been criticized for using tariffs and other trade barriers to protect domestic industries. Additionally, all five countries have complex tax systems that have been criticized for being burdensome for businesses (Bowdler & Malik, 2017). Trade openness and taxation are critical factors influencing the economic growth and development of BRICS countries. ...
... Raghutla (2020) also found that GPR is positively associated with tax revenues, and a study by Gnangnon (2021b) found that PLS is positively associated with tax revenues. On the other hand, this study also finds that INF has a negative effect on taxation, which is consistent with previous studies that have found that high INF can negatively impact tax revenues (Baunsgaard & Keen, 2010;Bowdler & Malik, 2017;Morrow et al., 2022). ...
This study aims to investigate the relationship between trade openness and taxation in BRICS countries. This study uses a panel dataset for 2000-2021 years and employs various econometric techniques such as the CSD test, unit root test, panel regression selection criteria, robustness checking FMOLS, and DOLS to validate the research model. The study finds that trade openness positively impacts taxation in BRICS countries. Specifically, the study finds that trade freedom, trade ratio, and average trade increase the tax-to-GDP ratio and tax collection. Additionally, the study finds that financial development, financial openness, GDP per capita, and political stability positively impact taxation, but inflation has a negative effect. The results imply support for comparative advantage theory, suggesting that trade openness can positively impact taxation. The findings also highlight the importance of financial development, financial openness, GDP per capita, and political stability for tax revenue collection. From a managerial perspective, the results suggest that policymakers in BRICS countries should prioritize measures that promote trade openness and economic growth to improve their taxation systems.
... In some studies, inflation volatility is mostly linked with openness, such as Bowdler and Malik (2017), Johar, Iqbal, and Asif (2020). Bowdler and Malik (2017) found a strong relationship between openness and inflation volatility by using a dynamic panel model of 96 countries. ...
... In some studies, inflation volatility is mostly linked with openness, such as Bowdler and Malik (2017), Johar, Iqbal, and Asif (2020). Bowdler and Malik (2017) found a strong relationship between openness and inflation volatility by using a dynamic panel model of 96 countries. The findings of Johar, Iqbal, and Asif (2020) supported the findings of Bowdler and Malik (2017) by using the Generalized Method of Moment (GMM) for the South Asian Association for Regional Cooperation (SAARC). ...
... Bowdler and Malik (2017) found a strong relationship between openness and inflation volatility by using a dynamic panel model of 96 countries. The findings of Johar, Iqbal, and Asif (2020) supported the findings of Bowdler and Malik (2017) by using the Generalized Method of Moment (GMM) for the South Asian Association for Regional Cooperation (SAARC). King (2012) and Taylor (2013) emphasized the importance of studying the variability in inflation and output to provide a better explanation of the trade-off between inflation and output. ...
This study investigates the short and long-run relationships between Inflation volatility, exchange rate, and output gap volatility using the ARDL bounds testing approach in Turkey. Also, we repeat the estimates by using the output gap as well. Moreover, we examine the causal relationship among these variables by using Toda-Yamamoto and frequency domain causality tests. For this purpose, the study uses quarterly time series data between 2005 Q1 and 2020 Q4. Both short and long-run results of the ARDL estimates indicate that there are statistically significant relationships between exchange rate and inflation volatility, between output gap volatility and inflation volatility, and between the output gap and inflation volatility. As expected long-run effect of the exchange rate on inflation, volatility is negative, and the effects of both output volatility and output gap on inflation volatility are positive. Also, causality tests results indicate that changes in the exchange rate, output gap volatility, and output gap will have permanent and temporary causal effects on inflation volatility. Therefore, the study results provide new evidence about the exchange rate, output gap volatility, and output gap. The policymakers should carefully consider these results to implement appropriate policies to reduce inflation volatility.
... Also, the variability of inflation in the 1990s was less and economies with floating exchange regimes did have relatively higher openness-inflation relationship. Bowdler and Malik (2017) studied openness and inflation volatility using difference and system Generalized Method of Moment (GMM) estimation techniques with a panel data covering 96 countries and spanning from the period 1961 to 2000. Bowdler and Malik (2017) reported a negative influence of openness on inflation volatility. ...
... Bowdler and Malik (2017) studied openness and inflation volatility using difference and system Generalized Method of Moment (GMM) estimation techniques with a panel data covering 96 countries and spanning from the period 1961 to 2000. Bowdler and Malik (2017) reported a negative influence of openness on inflation volatility. Bowdler and Malik (2017) argued that inflation volatility can be reduced by trade openness through restricting recourse to seigniorage during periods of temporary fiscal deficits, and also, by moving consumption and production towards goods whose terms of trade are relatively stable. ...
... Bowdler and Malik (2017) reported a negative influence of openness on inflation volatility. Bowdler and Malik (2017) argued that inflation volatility can be reduced by trade openness through restricting recourse to seigniorage during periods of temporary fiscal deficits, and also, by moving consumption and production towards goods whose terms of trade are relatively stable. This negative relationship is strongest among developing and emerging market economies. ...
Earlier empirical studies carried out on the relationship between openness and inflation have focused mainly on long run effects without considering the short run dynamics. However, this study looked at both the short run and long run relationship between openness and inflation for 25 countries in Sub-Saharan Africa (SSA) using an annual data spanning from 1985 to 2017. The Autoregressive Distributed Lag (ARDL) Model and the Dumitrescu Hurlin panel causality test were the main estimation techniques employed by this study. The results revealed a significant positive relationship between trade openness and inflation both in the short run and long run. Also, there was an evidence of positive relationship between financial openness and inflation both in the short run and long run. However, the relationship was statistically insignificant in the short run. The study further showed a bidirectional relationship between trade openness and inflation, at least for a 9-year lag period. These findings highlight the role openness play in affecting price levels in SSA. Hence, the study recommends that policy makers and various governments in SSA need to design and execute programmes that would help build import substitution industries. Also, government must strengthen the financial sector and increase its supervisory role by ensuring that laws are strictly adhered to by all financial actors. This will help curtail the problem of money laundry in the sub-region thereby reducing the adverse effects opening up the financial sector has on price levels.
... With a new economic globalization index (the KOF index), they suggest that a higher level of economic globalization will decrease inflation in both developed and developing countries during 1990 and 2000. In addition to the level of inflation, Bowdler and Malik (2017) Kim et al. (2016) find that in a sample of developing countries globalization of both trade and finance, on the average, exerts a significant and positive effect on inflation, whereas in a sample of developed countries, on the average, there is no significant impact of trade and financial openness. ...
... Apart from our benchmark results, i.e., the effect of trade openness on inflation across IT vs non-IT regimes, we consider two related extra tasks. The first one is, following Kim et al. (2016) to examine the impact of financial openness on inflation, and the second one is, following Bowdler and Malik (2017), to investigate the effect of trade openness on inflation volatility under distinct monetary regimes. ...
... Next, following Bowdler and Malik (2017), we go further to examine how trade openness would affect inflation volatility in different monetary regimes. In this experiment, inflation volatility is defined as the standard deviation of inflation in a 3-year rolling window and estimate results are reported in Table 9. ...
By applying an endogenous switching regression model to a sample of 64 countries, this article explores whether the effect of trade openness on inflation is influenced by the adoption of inflation targeting (IT). The outcome indicates that, while there exists a significant and negative impact of trade openness on inflation in the non-IT countries with flexible exchange rate system, the effect is negligible in the IT economies. In addition, the above differential inflation effect of trade openness across IT and non-IT regimes is only present in the developing subsample with flexible exchange rate system, but not the developed counterpart. Moreover, apart from trade openness, financial openness reinforces inflation in those developing countries not adopting IT, whereas no such significant effect is found in developing countries adopting IT. Instead of inflation, further results show that trade openness lowers inflation volatility both in developing and developed countries not adopting IT, yet the impact is smaller in developed country group. However, no such statistically significant link is found in developing and developed countries that adopt IT.
... Bleaney and Fielding (2002) find that developing countries with pegged exchange rates have lower inflation levels and volatility. Granato et al. (2006) and Bowdler and Malik (2005) find that trade openness can reduce inflation volatility. In another study, Rother (2004) concludes that volatility in discretionary fiscal policies has contributed to inflation volatility in a panel of 15 OECD countries for a period of 35 years. ...
... 18 Trade openness is accounted for in column 8, in which we include Log[Trade(%GDP)], taken from WDI-WB. According to Bowdler and Malik (2005), trade openness reduces inflation volatility by limiting the reliance on seigniorage revenues and by shifting consumption towards goods with stable terms of trade. Granato et al. (2006) conjecture that, if openness leads to a more aggressive inflation-stabilizing monetary policy, there should be a negative relationship between openness and the variance of inflation. ...
... We clearly show that those variables are important determinants of inflation volatility, and have sizeable direct effects, which go beyond their indirect effects operating through seigniorage and inflation levels already documented in the literature (see Veiga 2006, for inflation levels, and, and Aisen and Veiga 2005, for seigniorage revenues). Our results concerning the strong positive relationship between inflation levels and volatility are also consistent with previous findings (see, among others, Fischer et al. 2002;Granato et al. 2006;and Bowdler and Malik 2005). ...
... Inflation-openness relationship is one of the modern 'puzzles' in international macroeconomics, reflecting no regular relationship since each country has a different correlation between openness and inflation (Temple, 2002). For some researchers, the effect of trade openness on inflation is ambiguous (Bowdler & Malik, 2017) and therefore remains an open issue of debate at both theoretical and empirical levels. ...
... Empirically, since the studies conducted by Triffin and Grubel (1962), Iyoha (1973) and Romer (1993) several researches have investigated this relationship (e.g. Sachsida, Carneiro, & Loureiro, 2003;Lotfalipour, Montazeri, & Seidghi, 2013;Watson, 2016;Bowdler & Malik, 2017;Lin, Mei, Wang, & Yao, 2017, among others). However, the direction and the strength of the relationship associating openness and inflation are mixed. ...
... Kim and Beladi (2005) argue that while the openness-inflation relationship is positive in developed economies, it is negative in the developing ones. Similarly, Bowdler and Malik (2017) revealed that the impact of openness on inflation volatility is weaker among OECD economies but stronger among developing and emerging market economies. ...
Trade openness is an important determinant of the inflation process. The effect of trade openness on inflation, however, is still an issue of debate at both theoretical and empirical levels. This study tried to provide a contribution to the literature by examining the relationship between inflation and trade openness in Tunisia over the period 1975Q1-2015Q4 using a nonlinear model. The originality of this study stems from the fact that it is the first investigation considering both the Residual-Based Tests for Cointegration in Models with the Regime Shifts and Threshold Regression model. The linear model confirms the existence of a positive relationship between inflation and trade in Tunisia. Yet, considering the nonlinear model, trade openness growth and Consumer Price Index (CPI) inflation growth show a statistically significant negative link as long as the trade openness evolution does not exceed the threshold. Nevertheless, if the trade openness growth is higher than the threshold, integrating the trade positively affects CPI inflation. Furthermore, a positive influence of Money supply growth on this type of inflation was noticed in Tunisia in all the considered regimes proving the effect of monetary factors on inflation level. Consequently, trade openness could be used to control inflation in Tunisia.
... In order to model the impact of oil export on inflation, this study followed the study of Bowdler and Malik (2017) who specified inflation depends on trade openness. This study disaggregates the trade openness into oil export as the main aim of the study is to explore the impact of oil export on inflation the model is as equation (1): ...
... Where: cpi, is the consumer price index which is the proxy for inflation, ox is the oil export, decrease in export prices may reduce the nominal value of trade so that inflation rises (Bowdler and Malik, 2017). This study includes food production index (FPI) in the model of oil export and inflation because the four African OPEC members (Algeria, Angola, Libya and Nigeria) are food scarce countries. ...
... It is expected that β 1 , β 3 and β 4 to be positive while β 2 and β 5 to have negative impact on inflation. A decrease in export prices may reduce the nominal value of trade so that inflation rises (Bowdler and Malik, 2017). An increase in food production may reduce inflation pressure in food scarce countries (Kofi et al., 2015). ...
This study examined the long run impact of oil export and food production on inflation in African OPEC member countries. The countries consist Algeria, Angola, Libya and Nigeria. This study applied Pedroni cointegration test. In addition, dynamic panel ARDL models (PMG and MG estimators) were also used. This study found that the long-run coefficient of oil exports, money supply, exchange rate and GDP are positively related to inflation while food production is negatively related to inflation. The policy makers should maintain a certain level of oil export to minimize the rate of inflation, also to encourage domestic food production to reduce the rate of inflation. Besides that, the study also concludes that increase in money supply and depreciation of exchange rate cause inflation rate. Hence, the policy makers can use the contractionary monetary policy as well as currency control to reduce the inflation rate in OPEC member countries.
... Bleaney and Fielding (2002) find that developing countries with pegged exchange rates have lower inflation levels and volatility. Granato et al. (2006) and Bowdler and Malik (2005) find that trade openness can reduce inflation volatility. In another study, Rother (2004) concludes that volatility in discretionary fiscal policies has contributed to inflation volatility in a panel of 15 OECD countries for a period of 35 years. ...
... 18 Trade openness is accounted for in column 8, in which we include Log[Trade(%GDP)], taken from WDI-WB. According to Bowdler and Malik (2005), trade openness reduces inflation volatility by limiting the reliance on seigniorage revenues and by shifting consumption towards goods with stable terms of trade. Granato et al. (2006) conjecture that, if openness leads to a more aggressive inflation-stabilizing monetary policy, there should be a negative relationship between openness and the variance of inflation. ...
... We clearly show that those variables are important determinants of inflation volatility, and have sizeable direct effects, which go beyond their indirect effects operating through seigniorage and inflation levels already documented in the literature (see Veiga 2006, for inflation levels, and, and Aisen and Veiga 2005, for seigniorage revenues). Our results concerning the strong positive relationship between inflation levels and volatility are also consistent with previous findings (see, among others, Fischer et al. 2002;Granato et al. 2006;and Bowdler and Malik 2005). ...
The purpose of this paper is to empirically analyze the effects of political instability, social polarization and the quality of institutions on inflation volatility over time and across countries. Using the system-GMM estimator for linear dynamic panel data models on a sample covering 160 countries, analyzed in the period from 1960 to 1999, this paper finds that higher degrees of political instability and social polarization, less democracy, and lower de facto central bank independence are associated with more volatile inflation rates. Furthermore, political instability has greater effects on inflation volatility in developing countries with lower degrees of central bank independence and economic freedom.
... The empirical literature shows that inflation volatility is associated with a host of economic factors (Weber 2018), including trade openness (Bowdler and Malik 2017;Dincer and Eichengreen 2014), and fixed exchange rates (Bleaney and Fielding 2002). Beyond economic factors, governments' policies and institutions affect macroeconomic fundamentals including, potentially, inflation volatility. ...
... We also include Real GDP per capita, and Trade opennessthe sum of exports and imports as a share of GDPas in Dincer and Eichengreen (2014) and Bowdler and Malik (2017). These data are from the World Development Indicators (World Bank 2018). ...
... Kurihara (2013) conducted his research on the relationship between INF and TO by using the annual data of the Nigerian economy for the period of 1970-2005 and found an inverse association. Bowdler and Malik (2005) also found a negative relationship between INF and TO. They concluded that INF tends to increase the exchange rate which in turn makes the exports cheaper in the international market, and thereby, the countries face reduction in the competition of the international market. ...
... Institutions are eligible to make decisions in some arenas which can be defined as the sets of working rules that are used to determine what information must or must not be provided, what aggregation rules will be used, what procedures must be followed and what payoffs will be assigned to individuals depending on their actions. A number of researchers have tested the trade-off between governance and EG, FDI, INF and TI and revealed the significant contributions of governmental authorities in promoting EG (Barro and McCleary, 2003), FDI (Teplova and Sokolova, 2019), TI (Shao et al., 2021) and reducing INF (Bowdler and Malik, 2005), which are having significant influences on TO. Research also indicates that the government of a country makes many efforts to increase international competition. ...
Purpose-First, the current study contributes to the available debate by reinvestigating the impact of economic growth (EG), foreign direct investment (FDI), technological innovation (TI) and inflation (INF) on trade openness (TO). Second, the study tests the moderating role of institutional quality (INS) on the relationship among EG, FDI, TI and TO. Third, the study tests how TO contributes to EG efficiency. Design/methodology/approach-The study collects the data from the group of twenty (G20) economies for the period of 1998-2020. The study applied the Kao (1999), Pedroni (2001), and Palamuleni (2017) cointegration tests to test the long-run association between variables. The study applied fully modified least square (FMOLS) and dynamic least square (DOLS) models to test the hypotheses. Findings-Findings of the study showed the positive impact of EG, FDI and TI on TO, which becomes more positive in the presence of institutional quality. Results indicate that INS plays an enhancing role in the relationship between FDI and TO, EG and TO and TI and TO. The study showed a negative relationship between INF and TO, and institutional quality plays a buffering role in the relationship between INF and TO. Originality/value-First, the study reinvestigates the empirical association among EG, FDI, TI, INF and TO. Second, the study tests the moderating role of INS on the relationship between the proposed variables by developing an index of all the indicators of INS. Third, the study tests the contributions of TO in economic efficiency (ECE). The contributions of the present study will increase the available literature of TO and help the policy makers of G20 nations to suggest important policies to promote TO and ECE.
... The data on inflation are used to calculate a measure for inflation volatility, which is defined as rolling window standard deviation, as also computed by Bowdler and Malik (2017). These authors argued that volatility measures over long periods such as decades can detect spurious volatility due to shifts in mean inflation and extremely short windows can confound a break from mean as variance, rather than detecting volatility around a fixed mean. ...
... The first subset of benchmark controls consists of open economy variables. Bowdler and Malik (2017) argue that openness, defined as the sum of imports and exports as a percentage of GDP, translates into higher price stability. Higher exposure to global economy can also affect inequality through globalization channels discussed in literature review section. ...
This paper examines the relationship between macroeconomic instability, as measured by the variance of inflation and output, and income inequality. We develop a panel data set consisting of 61 developed and developing economies for 1990–2019. Our results highlight a positive relationship between past inflation variance and subsequent inequality. We find that this relationship is nonexistent in developed countries but is strong for developing economies. Developing countries that have adopted an inflation targeting (IT) regime are insulated from the regressive effect of inflation volatility. From the point of view of achieving an even income distribution, IT may be consistent with better equity and efficiency outcomes simultaneously. The main findings are robust to a rich set of controls, alternative measures of volatility and inequality, various subsample checks, and dynamic panel specifications.
... When 244inflation increases by 1%, the probability of using 245 currency derivatives of import-export enterprises in 246 Vietnam increases by 0.232% (model 5*). The above 247 results are consistent with some previous studies47,48 , 248 the change of currency shocks adversely affects the 249 growth of enterprises. High inflation affects corpo-250 rate profitability, corporate financial decision makers 251 face inflation risk in addition to exchange rate risk and 252 commodity price risk 21 .253The ...
The emergence of currency derivatives plays a particularly important role for import - export businesses in minimizing financial risks and ensuring profits from future purchase and sale contracts. Although currency transactions using this tool bring many benefits, it is also inevitable that some risks occur due to uncontrollable fluctuations in exchange rates, interest rates, inflation and foreign exchange reserves in international trading transactions for entrepreneurs. Therefore, the study is conducted with the objective of analyzing the macro factors affecting the decision to use currency derivatives of import-export enterprises in Vietnam. The study uses secondary data collected in the period 2015 - 2021 of 100 enterprises with import-export activities in Vietnam listed on stock exchanges. Applying the new regression model LASSO to analyze the rules, affecting the decision to use financial derivatives and compare with the results when using the S-GMM method. The main results show that all four main independent variables have a significant impact on the decision to use currency derivatives of Vietnamese import and export enterprises. These are all based on science as well as previous research. Specifically, among the four main independent variables, interest rates, inflation and exchange rates have a positive and significant impact on the decision to use currency derivatives of Vietnamese import and export enterprises; meanwhile, foreign exchange reserves have a negative impact on the decision to use currency derivatives of Vietnamese import and export enterprises. In conclusion, the research will make a major contribution to the correction of defects in the model through the LASSO regression model. After obtaining the research results, the study will provide management implications for businesses to make decisions about using the tool effectively with the least risk.
... In this context, monetary policy became compliant with inflation, and the public deficit was systematically financed by printing money. The greater the monopoly power in the nontradables sector, the greater the expansion of output caused by monetary expansion and, therefore, the greater the tolerance to inflation (Romer, 1993;Lane, 1997;Bowdler &Malik, 2005, Daniels andVanHoose, 2006). Therefore, the highly protected economy constitutes, along with inequality in income distribution, one of the foundations of fiscal irresponsibility and populism whose consequences were increasing trends in the level and volatility of inflation rates. ...
Purpose
The purpose is to market a reinterpretation of Brazilian economic history highlighting the importance of non-tradable goods to understand major historical developments such as the lack of industrialization in the mining boom; the rise and contribution of industries to development in the early 20th century; indexation as hyperinflation in the late 20th century; growth and cycles in the early 21st century.
Design/methodology/approach
Section 2 introduces analytical perspectives on the relationship between non-tradables, transport costs and external shocks. Section 3 presents a historical overview of the gold and coffee cycles in the Brazilian economy, which highlights the crucial role played by transport costs in the genesis of industrialization. Thus, in a more precise way, industrialization was not an import substitution process but the substitution of non-tradables by the domestic tradable manufactures.
Findings
Section 4 shows that Brazilian statistical records and historiography disregard this characterization and, to that extent, underestimate economic growth in the primary export phase (1872–1920) and overestimate growth rates in the industrialization period (1920–1940). Section 5 shifts to the end of the 20th century to analyze the relationship between non-tradables, indexation and hyperinflation. Section 6 concludes with a brief discussion of the role played by the terms of trade and non-tradables in the unfolding of the 2014 economic crisis.
Originality/value
Distance from international markets and a continental geographic size made transport costs in Brazil historically prohibitive: the relevance of non-tradables in the Brazilian economic history. While the theme is not new, it seldom received proper attention in the historiography.
... This lessens the monetary authorities' incentive to implement expansionary monetary policy. Moving on this phenomenon, open economies are expected to have lower inflation and several studies support the negative relationship between trade openness and inflation like Haq and Zhu (2016), Lin et al. (2017), Bowdler and Malik (2017), Jedidia et al. (2019), Bosnjak et al. (2022) and Hassan (2022). All of the above studies focus that trade openness being likely to negatively influence inflation through increased competition, reducing the cost of production over imported innovation, more exports, increase in FDI, and efficient allocation of resources. ...
... Here, export openness can be described export of goods and services to the total GDP, whereas import openness refers to the import of goods and services to the total GDP of an economy. The available literature shows studies use only the trade-to-GDP ratio as an openness indicator (Bowdler & Malik, 2005;Farvaque & Sarfaraz, 2009;Hanif & Batool, 2006;Jin, 2006;Kurihara, 2013;Lotfalipour et al., 2013;Yiheyis, 2013;Zakaria, 2011), only import openness as an indicator (Bowdler & Nunziata, 2006;Jin, 2006;Lin, 2010;Romer, 1993;Temple, 2002;Terra, 1998), as well as both export openness and import openness as a proxy to openness (Alfaro, 2005). As a result, this study uses all three proxies to represent the economy's openness. ...
The recent economic disturbances such as the outbreak of coronavirus, the Russia–Ukraine war, and disrupted supply chains, have resulted in high inflationary shocks that are difficult to combat. The most vulnerable to these global shocks are developing countries where trade is a crucial factor in economic growth. In this context, the study aims to investigate the impact of trade openness and output gap on inflation in BRICS countries from 1999Q1 to 2018Q4. Owing to growing economic integration and rising cross-sectional dependence, the study employs Dynamic Common Correlated Effect (DCCE) model to examine the long-run relationship between the variables. In addition, the study employs Dumitrescu and Hurlin (2012) to investigate the causal relationship between variables. The findings suggest that a more open trade policy helps to reduce rising domestic inflation. The price lowering impact of export openness outperforms the inflationary impact of imports, resulting in flattened Phillips curve. Moreover, the results indicate that the underpowered effect of the domestic output gap is not sufficient to counteract the unfavourable impact of the foreign output gap on inflation in BRICS. As a result, the study advocates providing subsidies and tax breaks to help export-oriented businesses thrive while keeping the global factors in check.
... Some recent papers provided sound empirical evidences in favour of Romer's hypothesis. Bowdler and Malik (2017) examined the linkage between trade openness and inflation volatility using a dynamic panel specification while controlling the endogeneity of openness and the effects from average inflation and exchange rate regime. The results suggested negative effects of trade openness on inflation volatility. ...
This study explores a unidirectional, negative effect of trade openness on inflation. In the context of globalization of the world economy the aforementioned linked becomes an important tool in examination of national economic policies. Within the framework of post-transition countries that are increasing their trade openness, its significance is exacerbated. Former socialist economies, that had firstly experienced a transition from planned to market economy, and then accessed into the European union, are also continuously increasing their trade openness with European union member states and the rest of the world. Implications of the aforementioned link for this economic area under the umbrella of the European union arise as these European union member states experience another transition and supersede its monetary policy sovereignty to European institutions, where monetary mechanisms for control of inflation and, consequently, unemployment are situated. Hence, the results of this study contribute to the on-going debate on the topic under consideration and improve understanding of inflation dynamics in the sample of socialist post-transition countries since inflation dynamics yield important implications for expected returns of investors and policy makers. This paper employs dynamic panel data approach with generalized method of moments as the estimator to empirically evaluate trade openness and inflation nexus within six European post- transition countries, namely Croatia, Czechia, Romania, Slovakia and Slovenia. While allowing endogeneity of considered variables and controlling effects from unemployment the estimates on annual panel data sample from 2000 up to 2019 suggest negative and statistically significant effects from trade openness to unemployment. Obtained estimates further suggest statistically significant and negative effects from unemployment to inflation. An increase in trade openness decreases unemployment rates while an increase in unemployment rates decreases inflation rates. Therefore, an increase in trade openness eventually leads to increases of inflation rates but no direct effects from trade openness to inflation rates was confirmed as assumed by Romer’s hypothesis. However, empirical results clearly pointed out existence of an effect from trade openness to inflation rates with mediating role of unemployment rates.
... Opening the economy not only improves the trade but it also helps to control the inflation. Bowdler et al. (2005) propose two mechanisms through which openness may restrict inflation volatility. The first relates to the collection of seigniorage while the second mechanism relates to the set of markets in which countries participate. ...
Trade between countries of the world is a vital economic index to be considered. Opening up the economy of a country will not only improve the trade of such a country, but will also affect its inflation rate, which is an important factor for policy decision makers. This study therefore used the VECM approach to investigate the effect of trade openness on the inflation of the Nigerian economy using annual data from 1970 to 2010. A multivariate cointegration test developed by Johansen was used to determine the existence of a long-run relationship among the variables. The results indicate two cointegrating equations at 5% level of significance and one cointegrating equation at 1% level. With the existence of at least one cointegrating vector, the VEC model was applied, which indicates a negative relationship between inflation and trade openness (-1.58) for the Nigerian economy, while the coefficient of the Error Correction Term (-0.91) of the model was significant and negative, which imply that the system corrects its previous period disequilibrium at a speed of approximately 91 percent annually. The results of the Impulse-Response Function (IRF) indicate that the response of inflation to openness shock was significant and positive for only two periods, but negative after the second period and all through the rest of the periods, thereby validating the negative relationship between inflation and trade openness in Nigerian economy.
... Empirical evidence indicates that there have been various studies on volatility and seasonality of inflation and exchange rate within various economies. Reduction in inflation volatility has been attributed to the openness of an economy (Bowdler and Malik 2005). Bleaney and Fielding (2002), after their investigation established that countries that adopt floating exchange rates experience higher level of volatilities in inflation than those that fix their rates, hence identifying exchange rate as a key factor that drives inflation. ...
This study examines whether there exists variation in the rate of changes in monthly currency exchange and inflation rates for the various months and quarters of the year. Monthly data were sourced from the time series data portal of Bank of Ghana and Ghana Statistical Service for USD/GHS rate and headline inflation respectively from March 1992 to December 2018. The study employs t-test, OLS regression and GARCH modelling techniques. The results indicate that over the period of the study, inflation was stable with insignificant changes observed between the various months and quarters of the year. For exchange rate however the changes were significant, with quarter 2 having the highest rate of change, followed by quarters 1, 4 and 3 in that order. The analyses also support the exchange rate pass-through in the long run as against the short-run since the changes observed between the two macroeconomic variables do not move in one direction at the same point in time. Both the exchange and inflation rates also displayed explosiveness in volatility shocks over the course of the period under study. Whilst the study confirmed the existence of leverage effect for the conditional volatility of monthly rate of inflation, we could not confirm same for conditional volatility of monthly exchange rate. With this information, businesses, households and policy makers in planning their yearly activities are to consider the observed trend of fluctuations in inflation and exchange rates. Accordingly, businesses should reformulate their strategies to time their international trading activities and payments to gain or mitigate against losses from the forex market. Policy makers could give guaranteed rates to such businesses and use this as a guide for managing their foreign reserves.
... The public debt instability effect of trade openness can materialize through various avenues. On the one hand, trade openness can contribute to reducing inflation volatility (e.g., Bowdler and Malik, 2017;Hau, 2002), which can in turn, lead to a fall in public debt instability. In fact, according to Forslund et al. (2011), the effect of inflation on public debt depends on how it affects external public debt and domestic public debt, in particular as domestic debt could be indexed to domestic prices. ...
This article investigates the effect of tax reform – which entails a convergence of developing countries’ tax structure towards that of developed countries – on public debt instability in developing countries. The empirical analysis has shown that a greater extent of tax reform reduces the instability of public debt, including when countries experience lower public revenue instability or when they open-up their economies to international trade. These findings have important policy implications.
... In the seminal paper by [15] study findings showed that there is a strong negative relationship between trade openness and inflation. Equally, [24] studied the relationship between trade openness and inflation. Their study centered around OECD countries and emerging economies as well. ...
Food Prices accounts for about 36% of the overall consumer price index in Kenya and it's the single largest of the 12 components that make up the index. Therefore, shocks in food prices could considerably be transmitted to the overall consumer price index. While Kenya agricultural production is heavily rain-fed, external pressures from and shocks from crude oil price, international trade are transmitted inwards and pile more pressure on food prices as well. While inflation tend to follow all the available information in the market and business per the rational expectations' theory, price factors are a key determinant of business cycles, because price stickiness tend to drive demand. Therefore, demand for food products could be driven by several market features including internal food prices, oil prices, productions and importation costs. The objective of this research was to analyze the effect of Trade openness on food inflation in Kenya with a view of establishing if Romer's hypothesis holds in Kenya. The second objective is to establish the effect of crude oil prices on food inflation in Kenya. The study employed Autoregressive Distributed Lag (ARDL) cointegrating technique to estimate both short-run and long run estimates. The study findings indicate that trade openness significantly has a reducing influence on food inflation hence confirming the existence of Romer's hypothesis in Kenya. Secondly, crude oil prices have a positive and significant effect on food inflation. Interestingly, the study found that money supply does not have significant influence on food inflation. The study recommends embracing and adopting international free trade agreements to further leverage on imports prices, increase buffer storage to cushion against food demand and hence stabilize food prices. Secondly the government should enhance further price controls on oil prices to reduce spillovers to food production and supply costs. In addition, Kenya should develop technologies to improve agricultural farm production to leverage dependence of rain-fed agricultural sector.
... Also, given the fact that large quantities of domestically consumed goods in Ghana are imported, a highly open economy implies more of these goods would be available in the economy with very little room for shortages, contributing to reduction in the rate of inflation. This result is consistent with the findings of Bowdler and Malik (2005), Muellbauer (2007) and Romer (1993). As expected, the effect of real monetary policy rate (R) was found to have negative and significant effect on long run inflation rate. ...
... For control variables, the increase of the rural population has a positive effect on food production, while that of the urban population has negative impact. As CEMAC producers are essentially rural, like those in other developing countries [24], an increase in this population has a positive impact on food production. This allows them to produce the bulk of consumer goods and, as a result, pulls CPI and FOODM down, while increasing DCM. ...
The aim of the study is to analyze the effect of external trade on food security in CEMAC countries during the period 1961-2017. In the early years of the independences, these countries have adopted a development model based on commodity production for export to industrialized economies. Foreign exchange from its exports should allow them to import the food products, while investing in food sector and in the others sectors needed for their development. Based on the instrumental variables method that corrects the problems of endogeneity and omitted variables, the result shows that external trade has a negative effect on food security in these countries. In fact, it has a negative impact on food production and household consumption. It also has a positive effect on the consumer price index. In addition, it does not lead to food imports. Thus, these results run counter of those of the existing literature based on the empirical studies in other developing countries that have found that foreign trade increased food security. In this context, the contribution of the study consists to providing a fresh look at the effect of foreign trade on food security. In fact, the results lead to not generalize the conclusions of the existing literature, notably in the countries of the sample. In this context, the CEMAC countries should diversify their productive structures by investing heavily in agriculture to achieve food security of their populations.
... Such macroeconomic determinants as trade openness, inflation and government expenditure can influence one another (see e.g. Bowdler & Malik, 2017;Kormendi & Meguire, 1985). Pradhan et al. (2014a) carry out an analysis on paired relations among four economic components-including the banking sector, stocks, and economic growth-and macro variables such as foreign direct investment (FDI), trade openness, the inflation rate, and government consumption and expenditure. ...
The derivatives market plays a crucial role in an economy. However, its link to economic growth and macroeconomic factors seem to be insufficiently covered in academic research despite the publication of many empirical studies on the causality of finance and growth. Recently, many emerging markets, such as Vietnam, have decided to establish a derivatives markets for risk management to ensure stability in the economy. This paper investigates the dynamic relationship among these key variables using up-to-date panel data on 17 countries, for which required data are available until 2017. This study yields various findings. First, bidirectional Granger causality between derivatives markets and economic growth exists internationally. Second, using panel vector autoregression, impulse-response functions, variance decomposition techniques as well as panel econometrics estimations, we find that trade openness and government spending have more effects on the derivatives market than economic growth and inflation. Third, we document that the derivatives market has a more integrated direct relationship with economic growth and macroeconomic factors in high-income countries than their upper-middle-income counterparts. These new findings are essential for consideration by policy makers in emerging markets in relation to the development of their derivatives markets.
... Thumrongvit et al. (2013) and Ruiz (2018) also use varieties of macroeconomic factors as control variables in the investigation the effects of financial development on economic growth. Bowdler and Malik (2017) find a statically significant effect of trade openness on inflation volatility. ...
Over the past three decades, China and India have attained economic power close to that of Japan and the U.S. During this period, the importance of the derivatives market within the financial market has been widely recognized. However, little supporting evidence is available on its economic effects. This paper investigates the dynamic relationship between the derivatives markets and economic development in these four large economies, which we consider together as the CIJU (China, India, Japan, and the U.S.) group. We use a Granger-causality test in the framework of a vector error correction model (VECM) to examine this causal and dynamic relation with data for the period 1998Q1 to 2017Q4. Derivative markets are found to positively contribute to economic development in the short run in the U.S., Japan, and India, but the effect disappears in the long run. In China, the derivatives market has a negative effect on economic development in the short run. However, in the long run, we observe a positive effect from the derivatives market on economic development based on two long-run estimation techniques, namely, dynamic ordinary least squares and fully modified ordinary least squares. Also, the development of derivative markets causes growth volatility in India, both in the short run and long run.
... Such macroeconomic determinants as trade openness, inflation and government expenditure can influence one another (see e.g. Bowdler & Malik, 2017;Kormendi & Meguire, 1985). Pradhan et al. (2014a) carry out an analysis on paired relations among four economic components-including the banking sector, stocks, and economic growth-and macro variables such as foreign direct investment (FDI), trade openness, the inflation rate, and government consumption and expenditure. ...
The derivatives market plays a crucial role in an economy. However, its link to economic growth and macroeconomic factors seem to be insufficiently covered in academic research despite the publication of many empirical studies on the causality of finance and growth. Recently, many emerging markets, such as Vietnam, have decided to establish a derivatives markets for risk management to ensure stability in the economy. This paper investigates the dynamic relationship among these key variables using up-to-date panel data on 17 countries, for which required data are available until 2017. This study yields various findings. First, bidirectional Granger causality between derivatives markets and economic growth exists internationally. Second, using panel vector autoregression, impulse-response functions, variance decomposition techniques as well as panel econometrics estimations, we find that trade openness and government spending have more effects on the derivatives market than economic growth and inflation. Third, we document that the derivatives market has a more integrated direct relationship with economic growth and macroeconomic factors in high-income countries than their upper-middle-income counterparts. These new findings are essential for consideration by policy makers in emerging markets in relation to the development of their derivatives markets.
... The negative association between OPEN and INF was postulated in the seminal paper by Romer (1993) in which the author opined that countries that have high degrees of openness to international trade and are likely to encounter lower rates of INF with rising OPEN. It is believed that more open economies experience lower INF rate volatilities as well, providing justification to Romer"s (1993) claim (Bowdler and Malik 2017). Export (EXP): Empirical evidence in the literature advocate in favor of the negative impacts of rising EXP levels with respect to triggering INF in the local economy. ...
Terms of Trade is inextricably linked to the export performance of countries like Bangladesh that have heavily banked on their respective export sector to dictate the overall development drives. Against this backdrop, this paper empirically sheds light on the nexus between terms of trade improvement and the possible inflationary pressures associated in the context of Bangladesh, incorporating annual time series data across 1980 and 2014. This study is of paramount significance for the nation following its journey towards making a graduation to becoming a developing economy whereby the nation would no longer be eligible for the prior preferential trade treatments it previously received being a member of the least developed countries. As a result, betterment of its terms of trade can play a key role in strengthening its export competiveness and escalate its export volumes. In light of the estimated results in this study, an inverted-U shaped non-linear association between terms of trade improvement and inflation is unearthed. Thus, these findings can be a starting point for Bangladesh to adopt relevant export- boosting policies via terms of trade enhancement without the fear of triggering inflationary pressures within the economy.
... In the same vein, Bowdler and Malik (2017) argue that trade openness can reduce volatility by shifting consumption and production towards goods for which the terms of trade are relatively stable. Likewise, Hegerty (2014) concludes that trade openness appears to be correlated with a reduction in output volatility for LDCs. ...
... Ghosh et al. (1997) and Bleaney and Fielding (2002) found that countries with a fixed exchange rate regime can achieve lower inflation volatility. According to Gruben and McLeod (2004), Bowdler and Malik (2005) and Granato et al. (2006), openness can reduce inflation volatility, while Rother (2004) revealed that discretionary fiscal policies have a strong positive link to inflation volatility. Finally, Aisen and Veiga (2007) presented research showing that political instability is associated with higher inflation volatility. ...
This work empirically investigates the effect of the interaction between the rule of law and legal central bank independence (CBI) on price stability (the level of inflation and inflation volatility), employing a panel dataset that covers up to 124 countries over the period from 1970 to 2013. A new, largely complete legal CBI dataset, covering 182 countries was used for the work. The results indicate that the effect of legal CBI on price stability depends on the strength of the rule of law. Moreover, the results reveal that legal CBI has no significant effect on price stability when the rule of law is weak. The findings also show that 67% of advanced countries possess a rule of law that is strong enough to maintain price stability by increasing central bank autonomy, while only 4.5% of developing countries possess it.
... The decade of 1990s witnessed an increasing popularity of inflation-targeting policies, particularly in small countries that remain highly open to international trade. As a result, a striking feature of recent global macroeconomic performance is the substantial decline in inflation rates around the world (Bowdler and Malik, 2006). This decline has taken place in developed countries as well as in less developed countries. ...
In models in which the absence of precommitment in monetary policy leads to inefficiently high inflation, an important prediction is that more open economies should have lower inflation rates. This article explores the relationship between trade openness and inflation for 152 countries during the period of 1950-1992. We check the validity of Romer's (1993) main result, that there is a negative link between trade openness and inflation. The paper also tests the Terra's (1998) criticism that the negative relationship between openness and inflation is due to severely indebted countries in the debt crisis period. Our analysis shows that the principal result of Romer still holds in the 1990s, however, Terra's criticism fails to hold in the 1990s as the negative relationship between inflation and openness remains unrestrictive to a subset of countries or specific time period.
The purpose of this study is to test and analyze Romer's hypothesis regarding the impact of trade openness on inflation. In addition, this study also aims to measure the threshold point of trade openness. The method used is the System GMM and the Threshold Panel for the period 2010-2021. The estimation results show that trade openness has a significant effect on inflation. The sign of the coefficient of trade openness is positive, meaning that an increase in trade openness will lead to higher inflation. These results mean that Romer's hypothesis is invalid in ASEAN. The government is expected to be able to reduce the degree of trade openness by re-establishing agreements with bilateral and multilateral countries. If the trade agreement is profitable then it is continued, if it is not profitable it is better not to continue. Keywords: Trade Openness, Inflation, System GMM, ASEAN
Ülkelerin dışa açıklığının ve bununla birlikte döviz kurlarındaki değişmelerin enflasyon üzerindeki etkisinin büyüklüğü para politikası yapıcıları açısından önem taşımaktadır. Bu çalışmanın amacı Türkiye için dışa açıklık ve döviz kurunun enflasyon üzerindeki etkilerini incelemektir. Türkiye için bu ilişkilerin asimetrik olabileceği düşüncesiyle, çalışmada NARDL yöntemi kullanılmıştır. Çalışmadan elde edilen temel bulgular çerçevesinde, Romer (1993)’in ticari dışa açıklık ile enflasyon arasında negatif ilişki bulunduğuna yönelik hipotezi reddedilmiştir. Finansal dışa açıklık ile enflasyon arasında ise uzun dönemde negatif ilişki tespit edilmiştir. Ayrıca reel efektif döviz kuru ile enflasyon arasında uzun dönemde negatif ilişki saptanmıştır. Çalışmanın ampirik bulgularına göre, ticari dışa açıklık ile enflasyon arasındaki ilişki uzun dönemde asimetrik iken kısa dönemde simetriktir. Ayrıca finansal dışa açıklık ve reel efektif döviz kuru ile enflasyon arasındaki ilişki hem uzun dönemde hem de kısa dönemde asimetriktir. Bu çalışma, elde edilen bulgular çerçevesinde politika yapıcılara Türkiye için Romer (1993) hipotezinin geçerli olmadığını ve enflasyonun belirleyicilerinden birinin de finansal dışa açıklık olduğunu göstermektedir.
This study first investigates the short and long-run effects of exchange rate, output gap and output gap volatility on inflation volatility in Turkey by using the ARDL bounds testing approach. Second, we also examine the causal relationship among these variables by using Toda-Yamamoto and frequency domain causality tests developed by Breitung and Candelon. The results of the ARDL estimates indicate that the exchange rate, output gap and output gap volatility have statistically significant effects on inflation volatility. Also, causality tests results indicate that changes in the exchange rate, output gap volatility, and output gap will have permanent and temporary causal effects on inflation volatility. The policymakers should carefully consider these results to implement appropriate policies to reduce inflation volatility. The finding that the shocks are of temporary nature will have particularly important implications on the policies fighting against the inflation.
This study contributes to the empirical inflation literature by identifying both short run and long run effects of the exchange rate and output gap volatility and output gap together, as well as by providing evidence about the structure of the shocks created by these variables on inflation volatility. This study also identifies the sources of temporary and permanent shocks of inflation volatility.
The macroeconomic instability of a small open economy creates impediments for effective policy making and stabile economic growth of the country. Armenia also suffer from a problem of macroeconomic volatility. The article aims to analyze the causes of this fluctuations, for which three vector autoregressive models were constructed and estimated, which show the impact of partner countries’ macroeconomic shocks to inflation, output, and real effective exchange rate of Armenia. The article also refers to the possible channels through which these shocks can be transmitted to the domestic economy. The results show that the macroeconomic fluctuations of Armenia is more sensitive to the shocks of the Russian world oil prices, Federation’s output, the interest rate of the US Federal Reserve and dollar’s real effective exchange rate.
Ticari dışa açıklık ile enflasyon arasındaki ilişkiyi araştıran çalışmalar son yıllarda artmaktadır. Bu çalışmalar içerisinde ise ön plana çıkan ve Romer hipotezi olarak isimlendirilen hipoteze göre küçük ve dışa açık ülkelerin ekonomilerinde ticari dışa açıklık arttıkça enflasyon oranı azalmaktadır. Bu çalışmada Türkiye’de ticari dışa açıklık ile enflasyon oranı arasındaki ilişkinin test edilmesi amaçlanmaktadır. Bu amaç doğrultusunda 1987-2021 yıllarına ait yıllık veriler kullanılarak geleneksel ADF, PP birim kök testi ve tek kırılmalı Zivot-Andrews birim kök testinin ardından Gregory Hansen ve FMOLS ve CCR analizi gerçekleştirilmiştir. Ulaşılan sonuçlara göre ticari dışa açıklıkla enflasyon değişkenleri arasında uzun dönemde negatif yönlü bir ilişki vardır.
There is a close relationship between monetary policy and financial development. Financial systems are essential to monetary policy as they act as conduits by which central bank policy tools are implemented. These tools are expected to influence financial market prices, reflecting market participants’ expectations about economic and monetary developments. Because monetary policy primarily works through expectations, its effectiveness is dependent on the transparency and credibility of the monetary policy framework. This is important because the evidence on monetary policy effectiveness has been largely inconclusive. There have been arguments that this could be conditioned on the independence of the central bank. We analyse the usefulness of central bank independence (CBI) in explaining the impact of monetary policy on banking sector and capital market development in Africa using Two-Stage GMM, Two-Stage Least Squares, and Fixed Effects estimation techniques, with data spanning 1970–2014 on 48 African countries. Using policy rate, money supply, and real interest rates as measures of monetary policy stance and CBI data from Garriga (2016) and Bodea and Hicks (2015), we find that monetary policy effectiveness on financial development is higher for the banking sector than for capital markets. Central bank independence has a significantly positive impact on both banking sector and capital market development. The effect of monetary policy on financial development is enhanced by CBI as the magnitude of its impact on financial is higher in the presence of higher levels of CBI in Africa. The policy implication for these findings is that monetary policy credibility is essential for financial development in Africa. This credibility could be found in making central banks in Africa independent of political control.KeywordsMonetary PolicyCentral Banks’ IndependenceFinancial DevelopmentAfrica
Inflation is a well-known and at the same time still insufficiently explained phenomenon of the socio-economic life of any country. This fact is related to the complexity and uncertain of the problem of inflation processes, as well as the fact that the essence of inflation evolves in time and changes in space, depending on the specific economic and political conditions in which the state finds itself. The investigation implemented a model of inflationary processes of Ukraine based on longitudinal data. Average wage index, industrial production index, regional volumes of foreign trade in goods and unemployment rate were used as factor variables for the model. Input information on the factor variables and the consumer price index as the resulting variable was collected across the regions of Ukraine for the period 2000–2020. After conducting a series of tests (Durbin-Wu-Hausman test and Wald test), the model was specified as a longitudinal data model with cross-sectional fixed effects. For such a model, it was necessary to apply the panel estimated generalized least squares method (panel EGLS), which is based on the assumed inequality of variance and therefore provides the opportunity to obtain the best linear estimates. After evaluating the unknown parameters of the model, namely the scalar coefficients, industrial production index, unemployment rate, average wage index, regional volumes of foreign trade in goods, we obtained the following values, respectively: 113.1856, 0.017839, -0.083791, -0.017515, -0.007895. In general, the quality assessment of the model gives good results. We can definitely state that the relationship between the consumer price index is close to, because the determination ratio is close to 1. Based on this, it is obvious that on average in the regions of Ukraine, 99.39% of changes in the consumer price index are explained by changes in the values of the average wage index wages, the index of industrial production, the size of regional volumes of foreign trade in goods and the level of unemployment. And the calculated value of the F-statistic exceeds the empirical value so the model adequately describes such a dependence. In general, the proposed panel model of inflationary processes of Ukraine has good quality indicators and is suitable and can be used for forecasting inflation at the regional level.
High and sustainable growth of gross domestic product with stable inflation is one of the objectives of the most macroeconomic policies both in the world and in Vietnam. Therefore, price stability plays a vital role in assuring GDP growth. In order to stabilize prices, fiscal and monetary policies need to be appropriately managed. The aim of this study is to assess the impact of the monetary and fiscal policies on inflation in Vietnam during the period from 1997 to 2020. This study has applied the vector autoregression (VAR) model along with data gathered from the World Bank and General Statistics Office of Vietnam. The research results indicate that Vietnam’s inflation is positively influenced by a fiscal deficit (2.943), money supply (2.672), government expenditure (8.347), and interest rate (3.187). Among the factors, government expenditure has the biggest influence on inflation. Besides, trade openness (–0.311) also influences inflation, but the effect is negative and negligible. Finally, the policy implications are focused on coordinating fiscal and monetary policies maintaining a moderate level of inflation for economic growth.
AcknowledgmentThis article is funded from the funding source of the research: “Solutions to deal with the risk of financial instability from support packages to fight economic recession caused by the covid-19 pandemic” with code B2022-MHN-02 by Vietnam Misnistry of Education and Training.
This paper develops a new model of an open economy for a study of macroeconomic dynamics under different degrees of trade and financial openness. The model is estimated using quarterly data on the Chinese economy over the period 2005Q3-2020Q4 and then applied to analyze how macroeconomic volatility varies with trade and financial openness in several representative settings. We find that the impacts on macroeconomic volatility of trade openness and financial openness depend on the nature of the underlying shocks and a moderate degree of trade openness, together with a high degree of financial openness, yield the optimal welfare results in most cases. These results highlight that the effects of trade and financial openness on macroeconomic volatility differ in various situations and that their interactions can lead to different welfare results.
1990’lı yıllarda artan küreselleşme eğilimleri ile beraber gelişmekte olan ülkeler yüksek enflasyon oranları ile karşılaşmaya başlamışlardır. Bu dönemde başlamak üzere, dışa açıklık ve enflasyon ilişkisi ekonomi literatüründe önemli yer edinmeye başlamıştır. Tartışmalar, gelişmekte olan ülkelerde ticari dışa açıklığın enflasyon üzerindeki negatif etkisini savunan Romer hipotezi ekseninde oluşmuştur. Bu çalışmanın amacı 2002 yılından sonra yüksek enflasyon olgusundan kurtulan Türkiye ekonomisinde Romer hipotezini ekonometrik yöntemlerle test etmektir. 2003Q1-2020Q3 dönemi çeyreklik verilerin kullanıldığı çalışmada, ARDL sınır testi yaklaşımı ve Toda Yamamoto nedensellik testleri uygulanmıştır. Çalışma sonucunda, eş-bütünleşme ilişkisi ile beraber ticari dışa açıklıktan enflasyona doğru tek yönlü nedensellik ilişkisi tespit edilmiştir.
Consequences of debilitated macroeconomic policies are unhealthy for household consumption in most African countries. With inflation, the market value of African household’s disposable income is eroded, which leads to lower consumption bundle and subsequently, hardship. Despite the magnitude and significance of household final consumption expenditures in Africa, the cause–effect, evidence-based policy options of macroeconomic policy-induced household consumption remain underexplored and less understood. To establish a clear line of thought on the macroeconomic policy volatility-household consumption relations in Africa, we assigned numerical weights to the output elasticities of macroeconomic policy volatilities and household consumption relations in twenty (20) African countries using the panel structural vector auto-regressive (PSVAR) estimation technique. We took cognisance of idiosyncratic and standard structural shocks responses. We allowed thoroughly ranked cross-sectional variances of dynamic elasticities. Findings reveal that macroeconomic policy volatilities induce significant changes in household final consumption expenditure in Africa. Policy implications were discussed.
The objective of this research paper is to check the impact of openness on inflation volatility. The time period ranges from 1986-2014 by utilizing Panel data for SAARC countries. Four proxy variables are used to calculate openness by using Generalized Method of Moment (GMM) and Impulse Response for the existence of short run and long run relationship. GMM results indicates that the relation depend on the proxy variable being used in the model. Export to GDP and KOF index shows negative impact on inflation volatility while Trade to GDP ratio has significant positive impact on inflation volatility. The empirical study suggests that exports should be encouraged as it resulted in decreasing rate of inflation as along with imports inflation is also imported in terms of commodity price.
During the past 30 years, India and China have achieved economic power in adjacent proximity towards Japan along with also the U.S. Throughout the particular phase, the value of the derivatives industry in the economic sector continues to be commonly recognized. Nevertheless, small supporting research can be purchased on the economic consequences of is. This particular paper investigates the powerful association between the derivatives marketplaces as well as economic improvement of these 4 big economies that we think about in concert so "the CIJU (China, India, Japan and the U.S.)" team. We make the utilization of a Granger connection check "in the framework of the vector error correction model (VECM) to" look at given dynamic as well as causal association with details for the duration 1998Q1 to 2017Q4. Imitative marketplaces are actually discovered to favorably add to financial improvement in the very small time in India, Japan, and the U.S., though the outcome fades in the extensive haul. In China, the products market place leads to a damaging outcome on economic improvement in the very small run. Nevertheless, as per the long term, we view a good impact as of the byproducts industry on economic growth built mostly over two long term opinion strategies, specifically, powerful standard very least squares and completely altered regular least squares. Furthermore, the improvement of derivative market segments brings about development volatility in India, each in the very small run along with very long term.
The study employed a Structural VAR model, using monthly time series data from 2002 to 2017 to assess the relationship between trade openness and effectiveness of monetary policy in Ghana. The empirical results revealed that as the degree of trade openness increases, monetary policy becomes more effective in reducing the rate of inflation. However, monetary policy is less effective to reduce the output gap. Therefore, the results suggest that monetary policy authorities must take into account the level of trade openness whenever they are formulating monetary policy.
The paper conducted comparative analysis of the effect of trade liberalization on food security in CEMAC and WAEMU Countries with data spanning the period 1987–2014. Overall the findings lead to the conclusion of a negative effect in general. The beneficial effect of trade on the food situation is most visible in terms of availability. Also, it leads to lower prices. However, adverse terms of trade appeared to wipe off the positive effects and lead to food insecurity. This outcome is robust for both the CEMAC and WAEMU samples. With regard to policy, these countries should implement trade policies to facilitate of openness, while supporting and diversifying domestic food production.
This paper estimates information stickiness with regard to inflation expectations in the United States and the Eurozone for the 1981/06–2015/12 and 1998/Q4–2015/Q2 periods, respectively, and further investigates whether such information stickiness is state-dependent. Based on a bootstrap sub-sample rolling-window estimation, we find that information stickiness varies over time, which contradicts the strict time dependency implied under sticky-information theory. We provide evidence that information stickiness depends on inflation volatility, which indicates that information stickiness is state-dependent and that it has a time trend. Using a threshold model, we estimate structural changes in the state-dependence and time-trend of information stickiness. The results show that information stickiness has been more dependent on inflation volatility and has had a higher time-trend in both regions following the 2008 financial crisis.
In closed or open economy models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We analyze this result in the context of developing economies, where a large proportion of households are credit constrained and the share of food expenditures in total consumption expenditures is high. We develop an open economy model with incomplete financial markets to show that headline inflation targeting improves welfare outcomes. We also compute the optimal price index, which includes a positive weight on food prices but, unlike headline inflation, assigns zero weight to import prices.
This paper focuses on two important questions concerning ination per-formance in a country sample of forty-two of the most developed countries in the world. The …rst is why ination tends to be more volatile in some coun-tries than in others, in particular in very small, open economies and emerg-ing market economies compared to the large and more developed ones. The empirical analysis suggests that the volatility of the risk premium in multi-lateral exchange rates, the degree of exchange rate pass-through to ination, and monetary policy transparency play a key role in explaining the cross-country variation in ination volatility. The second question is what explains the general decline in ination volatility over the sample period. Using a panel approach, the empirical analysis con…rms that the adoption of ination tar-geting has played a critical role in this improvement in addition to the three variables found important in the cross-country analysis. Ination targeting therefore continues to play an important role in reducing ination volatility even after adding the three controls to the panel analysis. The main conclu-sions are found to be robust to changes in the country sample and to di¤erent estimation methods. Sandra Zerafa from the Central Bank of Malta for further help with data from their respective countries, and Anella Munro from the BIS (Hong Kong o¢ ce) for her help with the Hong Kong data. Numerous comments and suggestions on an earlier version of the paper are greatly appreciated. None of the above is, however, responsible for any errors or omissions in the paper. The views expressed do not necessarily reect those of the Central Bank of Iceland.
Previous research on the optimal size of a monetary policy committee (MPC) focused on theoretical analyses and experimental studies. These studies suggest that the ideal monetary policy committee may not have many more than five members. In this paper we conduct an empirical cross-country study to explore whether there is a link between the size of an MPC and inflation volatility. The analysis for 75 countries which have adopted MPCs provides some support for the above suggestion: countries with less than five MPC members tend to have larger deviations from trend inflation than MPCs with five members; raising the number of MPC members above five does not contribute to a further reduction in volatility.
The purpose of this paper is to empirically analyze the effects of political instability, social polarization and the quality of institutions on inflation volatility over time and across countries. Using the system-GMM estimator for linear dynamic panel data models on a sample covering 160 countries, analyzed in the period from 1960 to 1999, this paper finds that higher degrees of political instability and social polarization, less democracy, and lower de facto central bank independence are associated with more volatile inflation rates. Furthermore, political instability has greater effects on inflation volatility in developing countries with lower degrees of central bank independence and economic freedom.
For several years, the Economic Freedom of the World (EFW) annual reports large set of nations around the world. 1 This index is designed to measure the degree to which a nation's policies and institutions protect its citizens' economic freedom. In this article, we explain the basic methodology employed in constructing the index and summarize the study's findings. What Is Economic Freedom? Any attempt to quantify economic freedom must begin with a solid theoretical under-standing of the concept. The EFW report holds the key ingredients of economic freedom to be personal choice, voluntary exchange, freedom to compete, and protection of person and property. Institutions and policies are consistent with economic freedom when they provide an infrastructure for voluntary exchange and protect individuals and their property from aggressors who seek to use violence, coercion, and fraud to seize things that do not belong to them. Legal and monetary arrangements are especially important: governments promote economic freedom when they provide a legal structure and a law-enforcement system that protect the property rights of owners and enforce contracts in an even-handed manner. They also enhance economic freedom when they facilitate access to sound money. In some cases, the government itself may provide a currency of stable value. In other instances, it may simply remove obstacles that retard the use of sound money that is 1 The most recent report is Gwartney and Lawson 2004. In this article, we draw heavily from the first chapter of that report.
Analysis of adjustment loans often overlooks their repetition to the same country. Repetition changes the nature of the selection problem. None of the top 20 recipients of repeated adjustment lending over 1980–99 were able to achieve reasonable growth and contain all policy distortions. About half of the adjustment loan recipients show severe macroeconomic distortions regardless of cumulative adjustment loans. Probit regressions for an extreme macroeconomic imbalance indicator and its components fail to show robust effects of adjustment lending or time spent under IMF programs. An instrumental variables regression for estimating the causal effect of repeated adjustment lending on policies fails to show any positive effect on policies or growth.
Abstract: South Africa's recent adoption of inflation targeting increases the need for good forecasting models of inflation and models for understanding the monetary transmission mechanism. This paper presents multi-step models for inflation and output, four-quarters ahead. The inflation model has an equilibrium correction form, which clarifies medium- or longer-run influences on inflation, including opening the economy to foreign imports. The model confirms the importance of the output gap and the exchange rate for forecasting inflation; and the influence from recent changes in the current account surplus to GDP ratio, which is also sensitive to short-term interest rates. However, a rise in interest rates can also raise inflation in the short-run, via a rise in mortgage interest payments (a component of the consumer price index). The unfortunate policy implications for South Africa are discussed. The output model uses a stochastic trend to measure long-run changes in the capacity to produce. On the demand side there are important negative interest rate effects, though these have been altered by changes in the monetary policy regime. The trade surplus and government surplus to GDP ratios, which also respond to interest rate changes, and improvements in the terms-of-trade, all have a positive effect on future output.
We develop a novel system of reclassifying historical exchange rate regimes. One key difference between our study and previous
classifications is that we employ monthly data on market-determined parallel exchange rates going back to 1946 for 153 countries.
Our approach differs from the IMF official classification (which we show to be only a little better than random); it also
differs radically from all previous attempts at historical reclassification. Our classification points to a rethinking of
economic performance under alternative exchange rate regimes. Indeed, the breakup of Bretton Woods had less impact on exchange
rate regimes than is popularly believed.
Dynamic panel estimates show the negative relation between trade openness and inflation found by Romer (Quarterly Journal of Economics, (VIII, 869-903, 1993) but questioned by Terra (Quarterly Journal of Economics, (XIII, 641-48, 1998) became more robust in the 1990s, both among high income OECD and developing countries. Trade openness was also associated with less variable inflation during the 1990s and had a stronger disinflation effect in economies with floating exchange rates.
Temple (2002) argues that the inflation level used in Romer (1993) lacks power in revealing the policy intentions of monetary authorities. Temple also points out that Romer's use of the openness–inflation correlation cannot be explained by time consistency theory. In this article, we demonstrate that more open economies experience less inflation volatility and persistence. We attribute our findings to the hypothesis that monetary authorities in more open economies adopt more aggressive monetary policies. This pattern emerges strongly after 1990. Our results indicate that the near-universal regime shift in 1990 is not just a simple process of increased monetary policy aggressiveness, but an increased response to economic openness.
The purpose of this paper is to empirically analyze the effects of political instability, social polarization and the quality of institutions on inflation volatility over time and across countries. Using the system-GMM estimator for linear dynamic panel data models on a sample covering 160 countries, analyzed in the period from 1960 to 1999, this paper finds that higher degrees of political instability and social polarization, less democracy, and lower de facto central bank independence are associated with more volatile inflation rates. Furthermore, political instability has greater effects on inflation volatility in developing countries with lower degrees of central bank independence and economic freedom.
UK inflation has varied greatly in response to many economic policy and exchange-rate regime shifts, two world wars and two oil crises, as well as legislative and technological changes. Inflation is modelled as responding to excess demands from all sectors of the economy: goods and services, factors of production, money, financial assets, foreign exchange, and government deficits. Equilibrium-correction terms are developed for each of these over the sample. Indicator variables and commodity prices capture turbulent years. Variables representative of most theories of inflation matter empirically, yielding an eclectic model inconsistent with any 'single-cause' explanation. Copyright © 2001 John Wiley & Sons, Ltd.
Output volatility has been shown to be negatively correlated with economic growth across countries.1 Recent studies document that the correlation is not only robust to alternative samples and estimation techniques, but that the direction of causality goes from volatility to growth.2 Given the robustness and the policy relevance of these results, it is surprising that so few attempts have been made to identify the causes of output volatility to date.3 This paper bridges that gap by studying the empirical determinants of volatility, with a particular focus on the role of openness to commercial trade.4
Output volatility naturally relates to the frequency and size of the shocks that affect an economy and to the manner in which the economy handles the shocks.5 Openness to trade is thus commonly associated with greater output volatility: presumably, the more exposed to trade a country is, the more vulnerable it is to shocks coming from abroad.6 Nevertheless, economists believe that trade openness promotes economic growth.7 The combination of these results has led some observers to identify a general consensus on the interrelationship between openness to trade, output volatility, and growth. As Kose, Prasad, and Terrones state, “While there appears to be a general consensus that openness to trade flows stimulates domestic growth, it is also the case that such openness increases the vulnerability to external shocks.”8 To the extent that external and internal shocks are not negatively correlated, a greater vulnerability to external shocks implies more output volatility. If openness to trade increases output volatility and growth, but output volatility hurts growth, then either the direct effect of trade on growth outweighs the indirect effect, or there is something wrong with one of the presumed links. In this paper I present new evidence that the latter is likely to be the case. In particular, I show in a single cross-section of seventy-seven countries—twenty-one of which are members of the Organization for Economic Cooperation and Development (OECD)—that the effect of trade openness on output volatility is negative rather than positive.
In the paper, I do not deal with the direct link between trade openness and growth, and to the extent that I touch on the link between output volatility and growth, I rely on research by Hnatkovska and Loayza, who use the same dataset.9 Exploring these issues in depth is beyond the scope of this paper, however. Here, I present new evidence that points toward a negative causal link between trade openness and output volatility. This new result is consistent with research showing that openness to trade reduces vulnerability to some forms of financial crises and that openness to trade smooths the adjustment in the aftermath of external shocks.10 On both accounts, openness to trade might reduce output volatility. This effect counteracts the effect that goes from trade openness to exposure to trade-transmitted volatility in world goods markets (that is, terms-of-trade shocks). This is also consistent with Calderón, Loayza, and Schmidt-Hebbel, who find evidence that trade openness provides the means for the domestic economy to diversify away some external sources of risk.11
The previous empirical attempts that either directly or indirectly assess the impact of openness to trade on income volatility do not test whether trade exerts an independent effect on volatility once the terms-of-trade risk is taken into account. I do so by introducing in all the regressions the de facto trade openness variable (the trade-to-GDP ratio), along with an interacted variable to account for the possibility that more open economies are naturally more prone to terms-of-trade risk. The underlying hypothesis is that, to the extent that the latter effectively controls for that risk, any other effect of trade on volatility should manifest itself through the point estimate of the openness coefficient.
Another relevant issue that is largely ignored in the related literature is the probable endogeneity of trade in this setting. If trade is endogenous to output levels (because, for example, richer countries tend to liberalize trade barriers, as their mode of public finance shifts from tariff revenue to income or value added taxes), then it is...
Examining the correlation between trade and income cannot identify the direction of causation between the two. Countries' geographic characteristics, however, have important effects on trade and are plausibly uncorrelated with other determinants of income. This paper, therefore, constructs measures of the geographic component of countries' trade and uses those measures to obtain instrumental variables estimates of the effect of trade on income. The results provide no evidence that ordinary least-squares estimates overstate the effects of trade. Further, they suggest that trade has a quantitatively large and robust, though only moderately statistically significant, positive effect on income.
The robust negative correlation between openness and inflation found in cross-country data for the 1970s and 1980s has disappeared in the 1990s. There is now a strong negative correlation of inflation with per capita GDP, as higher-income countries have achieved significant disinflation not emulated by lower-income countries. Since 1973, the most consistent finding is that floating exchange rate regimes are associated with inflation rates at least 10 percent a year higher than pegged exchange rate regimes, after allowing for other factors. There is also a consistent positive correlation between land area and inflation.
This paper relates the time-consistent inflation rate to the degree of trade openness of an economy. The mechanism linking the welfare effects of monetary surprises (and hence the incentives to inflate) to openness does not rely on a large-country terms of trade effect but rather is due to imperfect competition and nominal price rigidity in the non-traded sector. The empirical evidence supports the main predictions of the model. © 1997 Elsevier Science B.V.
This article develops a framework for efficient IV estimators of random effects models with information in levels which can accommodate predetermined variables. Our formulation clarifies the relationship between the existing estimators and the role of transformations in panel data models. We characterize the valid transformations for relevant models and show that optimal estimators are invariant to the transformation used to remove individual effects. We present an alternative transformation for models with predetermined instruments which preserves the orthogonality among the errors. Finally, we consider models with predetermined variables that have constant correlation with the effects and illustrate their importance with simulations.
This paper analyses globalisation using a small general equilibrium model. It concludes that whether increased openness (a reduction in the costs of international trade) helps to discipline monetary policy in large open economies depends on the type of trade costs. Moreover, to the extent that globalisation induces stronger competition in the goods market, this may also have an adverse effect on monetary policy discipline. The latter is due to international expenditure switching, which becomes a more forceful channel as competition intensifies. Thus, the answer to the question in the title is not necessarily affirmative.
This paper introduces a framework for analyzing the role of financial factors as a source of instability in small open economies. Our basic model is a dynamic open economy model with a tradeable good produced with capital and a country-specific factor. We also assume that firms face credit constraints, with the constraint being tighter at a lower level of financial development. A basic implication of this model is that economies at an intermediate level of financial development are more unstable than either very developed or very underdeveloped economies. This is true both in the sense that temporary shocks have large and persistent effects and also in the sense that these economies can exhibit cycles. Thus, countries that are going through a phase of financial development may become more unstable in the short run. Similarly, full capital account liberalization may destabilize the economy in economies at an intermediate level of financial development: phases of growth with capital inflows are followed by collapse with capital outflows. On the other hand, foreign direct investment does not destabilize.
The paper extends Woodford’s [Optimizing models with nominal rigidities, Chapter 3 of Interest and prices: foundations of a theory of monetary policy, Princeton University, 2000; unpublished manuscript] analysis of the closed economy Phillips curve to an open economy with both commodity trade and capital mobility. We show that consumption smoothing, which comes with the opening of the capital market, raises the degree of strategic complementarity among monopolistically competitive suppliers, thus rendering prices more sticky and magnifying output responses to nominal GDP shocks.
This paper explores a possible link between financial development and trade in manufactures. The theoretical model focuses on the role of financial intermediaries in facilitating large-scale, high-return projects and shows that economies with better-developed financial sectors have a comparative advantage in manufacturing industries. We provide evidence for this hypothesis, first proposed by Kletzer and Bardhan (Journal of Development Economics 1987;27:57–70), using a 30-year panel for 65 countries. Controlling for country-specific effects and possible reverse causality, we show that financial development exerts a large causal impact on the level of both exports and the trade balance of manufactured goods.
The median developing country has had significantly higher inflation than the median advanced country since the early 1980s. We present a model in which a developing country may reduce inflationary expectations by pegging its exchange rate to the currency of an advanced country, at the expense of forgoing its ability to compensate for real exchange rate shocks. Different types of pegged exchange rate offer varying degrees of anti-inflation credibility and of exposure to shocks. Tests on a sample of 80 developing countries support the empirical predictions of the model.
We estimate a version of the Melitz and Ottaviano [Melitz, Marc J. and Ottaviano, Gianmarco I.P., 2008, Market size, trade, and productivity, Review of Economic Studies 75(1), pp. 295–316.] model of international trade with firm heterogeneity. The model is constructed to yield testable implications for the dynamics of prices, productivity and markups as functions of openness to trade at a sectoral level. The theory lends itself naturally to a difference in differences estimation, with international differences in trade openness at the sector level reflecting international differences in the competitive structure of markets. Predictions are derived for the effects of both domestic and foreign openness on each economy. Using disaggregated data for EU manufacturing over the period 1989–1999 we find short run evidence that trade openness exerts a competitive effect, with prices and markups falling and productivity rising. The response of profit margins to openness has implications on the conduct of monetary policy. Consistent with the predictions of some recent theoretical models we find some, albeit weaker, support that the long run effects are more ambiguous and may even be anti-competitive. Domestic trade liberalization also appears to induce pro-competitive effects on overseas markets.
This paper documents a strong negative correlation between government size and output volatility both for the OECD countries and across US states. This correlation is robust to the inclusion of a large set of controls as well as to alternative methods of detrending and estimation. In the international sample, a one percentage point increase in government spending relative to GDP reduces output volatility by eight basis points. Whereas in the US states the reduction in volatility is significantly larger ranging from 13 to 40 basis points.
We study how monetary, exchange-rate and other institutional arrangements are associated with policy makers’ preferences for inflation stability. We argue that focusing on policy intentions, represented by these preferences, constitutes a better way of evaluating policy behavior, instead of looking at inflation outcomes that may be unavoidable at times.Using a panel of 34 countries over a period of 24 years we find that a high degree of preference for inflation stability is significantly correlated only with central bank independence and membership to the European Economic and Monetary Union for low inflation countries, whereas for high inflation countries only strict inflation targeting and, to some extent, central bank independence, are relevant for inflation stabilizing policies. Finally, we find no robust evidence suggesting that either adopting an exchange rate anchor or employing fiscal policy are associated with an inflation averse behavior.
Estimation of the dynamic error components model is considered using two alternative linear estimators that are designed to improve the properties of the standard first-differenced GMM estimator. Both estimators require restrictions on the initial conditions process. Asymptotic efficiency comparisons and Monte Carlo simulations for the simple AR(1) model demonstrate the dramatic improvement in performance of the proposed estimators compared to the usual first-differenced GMM estimator, and compared to non-linear GMM. The importance of these results is illustrated in an application to the estimation of a labour demand model using company panel data.
This paper further tests Romer's [Romer, D., 1993. Openness and inflation: theory and evidence. Quarterly Journal of Economics 58, 869–903] extension of Kydland and Prescott's [Kydland, F., Prescott, E., 1977. Rules rather than discretion: the inconsistency of optimal plans. Journal of Political Economy 85, 473–491] predictions for dynamic inconsistency problems in open economies. In a panel data set of developed and developing countries from 1973 to 1998, I find that openness does not play a role in restricting inflation in the short run. On the other hand, a fixed exchange-rate regime plays a significant role. The results are robust to controlling for other variables that determine inflation, performing sensitivity analysis, and using a de facto exchange-rate regime classification.
This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized
method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our
GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation
in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables.
We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying
restrictions and Hausman specification tests.
This paper provides comprehensive evidence on the relation between inflation and globalization, defined here as trade and financial openness, using a large cross-section of 91 countries over the period 1985-2004. We establish two main empirical regularities: both higher trade and financial openness (i) reduce central banks' inflation bias, yielding lower average inflation and (ii) are associated with a larger output-inflation tradeoff. This evidence is at odds with the standard Barro-Gordon framework, which would require globalization to have a negative effect on the output-inflation tradeoff to yield lower equilibrium inflation, but it is consistent with a recent strand of new Keynesian models emphasizing the role of imperfect competition and nominal rigidities. Our findings also support the relevance of the time-inconsistency hypothesis, which underlies the theoretical models predicting a relation between globalization and inflation. For the OECD subsample, however, we do not find an effect of openness on inflation (the output-inflation tradeoff), suggesting that these countries have created an institutional framework for central banks that eliminates distortions due to the time-inconsistency problem.
How to improve healthcare access for Chinese migrants? We show that the social network is a major key. It uses a 2006 dataset from a survey of rural migrant workers conducted in five cities amongst the most economically advanced. We use a fixed effect logit model and we control for the non-exogeneity of the health insurance. The empirical findings support the hypothesis of return to the hometown for migrant workers with deteriorated health. The residence registration system and the importance of family/relative support in the outcome of the treatment incent them to then leave the city. Besides the level of income, the social integration of migrant workers is such a decisive criteria of the access to healthcare. Politicies aiming at improving the latter should involve organisations working at the local level, such as the resident committees.
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 unanticipated expansion are decreasing in the degree of openness. Models
in which the absence of precommitment in monetary policy leads to excessive inflation therefore predict lower average inflation
in more open economies. This paper tests this prediction using cross-country data. The data show a strong and robust negative
link between openness and inflation.
Recent research suggests that the Phillips curve slope, measured using sacrifice ratios from the period 1961-88, is positively related to trade openness, contradicting the Romer [1993. Openness and inflation: theory and evidence. Quarterly Journal of Economics 108, 869-903.] hypothesis that disinflations are less costly in open economies. In this paper I consider sacrifice ratios and output-inflation trade-offs from 1981-98 and allow their dependence on openness to vary with the exchange rate regime. Sacrifice ratios are weakly negatively related to openness, but the strength of the relationship does not increase with exchange rate flexibility. Output-inflation trade-offs are negatively related to openness, and the strength of the relationship increases with exchange rate flexibility.
We build a 4-equation model of the inflation process in South Africa (which has recently adopted inflation targeting), including the exchange rate, consumer prices, producer price, and import prices. This provides useful information on the speed and extent of exchange rate pass-through, and illuminates the various channels through which monetary policy influences inflation. The model is in the tradition of central bank models of the inflation process, but carefully tests for asymmetries, structural breaks and expectations effects, and applies a range of econometric tests and methods to refute the charge that such models necessarily impose .incredible. restrictions, Sims (1980).
This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political autonomy of the central banks in emerging market and developing countries. Our analysis confirms that greater CBA has on average helped to maintain low inflation levels. The paper identifies four broad principles of CBA that have been shared by the majority of countries. Significant differences exist in the area of banking supervision where many central banks have retained a key role. Finally, we discuss the sequencing of reforms to separate the conduct of monetary and fiscal policies. IMF Staff Papers (2009) 56, 263–296. doi:10.1057/imfsp.2008.25; published online 23 September 2008
We study empirically the macroeconomic effects of an explicit "de jure" quantitative goal for monetary policy. Quantitative goals take three forms: exchange rates, money growth rates, and inflation targets. We analyze the effects on inflation of both having a quantitative target and hitting a declared target. Our empirical work uses an annual data set covering 42 countries between 1960 and 2000, and takes account of other determinants of inflation (such as fiscal policy, the business cycle, and openness to international trade) and the endogeneity of the monetary policy regime. We find that both having and hitting quantitative targets for monetary policy is systematically and robustly associated with lower inflation. The exact form of the monetary target matters somewhat (especially for the sustainability of the monetary regime) but is less important than having some quantitative target. Successfully achieving a quantitative monetary goal is also associated with less volatile output. Copyright 2007 The Ohio State University.
Boschen and Weise (Journal of Money, Credit, and Banking, 2003) model the probability of a large upturn in inflation in the OECD (an inflation start). We extend their work to consider the impact of trade openness on the probability of such an event. The main finding is that increased openness reduces the probability of an inflation start, both directly, and indirectly through restricting the role of general elections in triggering inflation starts.
Traditional explanations of the negative correlation between openness and inflation presume that an inverse relationship between the degree of openness and the sacrifice ratio reduces the inflation bias of discretionary monetary policy. Temple (2002) concludes, however, that such a relationship fails to emerge in cross-country data. Our analysis of the same cross-country data considered by Temple indicates that once the degree of central bank independence and its interaction with greater openness is considered, there is an unambiguous positive relationship between openness and the sacrifice ratio. In addition, increased openness lessens the positive effect of central bank independence on the sacrifice ratio.
Models of open economies with nominal rigidities are often thought to predict a correlation between openness to trade and the slope of the output-inflation trade-off, or Phillips curve. Using a variety of measures of the trade-off and a standard measure of openness, this paper argues that the direct evidence for a correlation is not strong. In turn, this calls into question the usual explanation for the negative correlation between openness and inflation that was documented by Romer (1993). The paper considers some alternative explanations for the Romer evidence.
We examine the deep determinants of long-run macroeconomic stability in a cross-country framework. We find that conflict, openness, and democratic political institutions have a strong and statistically significant causal impact on macroeconomic stability. Surprisingly the most robust relationship of the three is for democratic institutions. A one standard deviation increase in democracy can reduce nominal instability nearly fourfold. This impact is robust to alternative measures of democracy, samples, covariates, and definitions of conflict. It is particularly noteworthy that a variety of nominal pathologies discussed in the recent macroeconomic literature, such as procyclical policy, original sin, and debt intolerance, have common origins in weak democratic institutions. We also find evidence that democratic institutions both strongly influence monetary policy and have a strong, independent positive effect on stability after controlling for various policy variables.
Weak instruments arise when the instruments in linear instrumental variables (IV) regression are weakly correlated with the included endogenous variables. In generalized method of moments (GMM), more generally, weak instruments correspond to weak identification of some or all of the unknown parameters. Weak identification leads to GMM statistics with nonnormal distributions, even in large samples, so that conventional IV or GMM inferences are misleading. Fortunately, various procedures are now available for detecting and handling weak instruments in the linear IV model and, to a lesser degree, in nonlinear GMM.
Based on the empirical firm growth literature and on heterogeneous (microeconomic) adjustment models, this paper empirically investigates the impact of European industry fluctuations and domestic business cycles on the growth performance of European firms. Since the implementation of the Single Market program the EU 27 member countries share a common market. Accordingly, the European industry business cycle is expected to become a more influential predictor of European firms' behaviour at the expense of domestic fluctuations. Empirically, the results of a two-part model for a sample of European manufacturing firms reject this hypothesis. Additionally, subsidiaries of multinational enterprises constitute the most stable firm cohort throughout the observed business cycle.
We estimate the impact on US non-residential fixed investment of permanent and temporary inflation uncertainty. We find that while both have a negative effect, temporary uncertainty is more important for investment. This study has implications for monetary policy and applied-econometric practice.
Recent decades have seen a considerable expansion of global trade and a simultaneous decline in inflation volatility. This paper investigates whether greater openness to trade helps achieve inflation stability. Using panel data for a sample of developing and industrial countries over the period 1961-2000, we document a negative and statistically significant effect of openness on inflation volatility. This relationship is estimated after controlling for the potential endogenity of openness, and the average rate of inflation. We conduct a battery of robuistness tests, showing in particular the robustness of our conclusions to controlling for the choice of exchange rate regime. A sub-sample analysis suggests that the relationship between openness and inflation volatility is more pronounced in developing and emerging market economies thanin OECD countires. We also identify potential channels underpinning this relationship. In particulare, we provide eveidenc that openness may promote inflation stability through dampening monetary and terms of trade shocks.
This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political autonomy of the central banks in emerging market and developing countries. Our analysis confirms that greater CBA has on average helped to maintain low inflation levels. The paper identifies four broad principles of CBA that have been shared by the majority of countries. Significant differences exist in the area of banking supervision where many central banks have retained a key role. Finally, we discuss the sequencing of reforms to separate the conduct of monetary and fiscal policies. IMF Staff Papers (2009) 56, 263–296. doi:10.1057/imfsp.2008.25; published online 23 September 2008
This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political autonomy of the central banks in emerging market and developing countries. Our analysis confirms that greater CBA has on average helped to maintain low inflation levels. The paper identifies four broad principles of CBA that have been shared by the majority of countries. Significant differences exist in the area of banking supervision where many central banks have retained a key role. Finally, we discuss the sequencing of reforms to separate the conduct of monetary and fiscal policies. IMF Staff Papers (2009) 56, 263–296. doi:10.1057/imfsp.2008.25; published online 23 September 2008
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.
A new set of international comparisons covering the period 1950–85 is developed here for 121 market and 9 centrally planned economies. This new so‐called Penn World Table (Mark 4), a completely revised and updated expansion of an equivalent table published by the authors in 1984, draws on the data of two previously unavailable international comparison benchmark studies. This article presents a detailed description of all estimation procedures, and excerpts from the overall DATA TABLE covering two years, 1980 and 1985. Three computer diskettes accompanying this article (and also available from the authors) contain the complete 36–year, 60,000 entry DATA TABLE in a form that economizes on scarce journal space and is immediately machine‐readable. For the 121 market economies, the DATA TABLE gives annually, in addition to population and exchange rates, real product and price level estimates for four different national income concepts, and for the major subaggregates, consumption, investment, and government. Only population and real gross domestic product estimates are given for the nine centrally planned economies, however.
This new table is one more step toward the goal of establishing a new worldwide System of Real National Accounts.
This article forges an explicit link between an objective measure of political constraints and variation in cross-national growth rates. It derives a new measure of political constraints from a simple spatial model of political interaction that incorporates information on the number of independent branches of government with veto power and the distribution of preferences across and within those branches. The derived variable is found to have a statistically and economically significant impact on growth rates using simple ordinary least squares, three-stage least squares and generalized method of moments estimation techniques. Copyright 2000 Blackwell Publishers Ltd..
While most economists agree that seigniorage is one way governments finance deficits, there is less agreement about the political, institutional and economic reasons for relying on it. This paper investigates the main political and institutional determinants of seigniorage using panel data on about 100 countries, for the period 1960–1999. Estimates show that greater political instability leads to higher seigniorage, especially in developing, less democratic and socially-polarized countries, with high inflation, low access to domestic and external debt financing and with higher turnover of central bank presidents. One important policy implication of this study is the need to develop institutions conducive to greater political stability as a means to reduce the reliance on seigniorage financing of public deficits.
The last two U.S. expansions have been unusually long. One view is that this is the result of luck, of an absence of major adverse shocks over the last twenty years. We argue that more is at work, namely a large underlying decline in output volatility. This decline is not a recent development, but rather a steady one, visible already in the 1950s and the 1960s, interrupted in the 1970s and early 1980s, with a return to trend in the late 1980s and the 1990s. The standard deviation of quarterly output growth has declined by a factor of 3 over the period. This is more than enough to account for the increased length of expansions. We reach two other conclusions. First, the trend decrease can be traced to a number of proximate causes, from a decrease in the volatility in government spending early on, to a decrease in consumption and investment volatility throughout the period, to a change in the sign of the correlation between inventory investment and sales in the last decade. Second, there is a strong relation between movements in output volatility and inflation volatility. This association accounts for the interruption of the trend decline in output volatility in the 1970s and early 1980s.