Openness, exchange rate regimes and the Phillips curve

Abstract

A number of theoretical models predict that the slope of the Phillips curve increases with trade openness, but cross-country studies provide little evidence for such a correlation. We highlight two reasons for this …nding. Firstly, the strength of the relationship may depend on the extent of exchange rate adjustment, which is a potential determinant of output and in ‡ation dynamics in open economies, but previous studies have not made a distinction between …xed and ‡oating exchange rate regimes.Secondly, existing estimates of the Phillips curve slope are based on data from the 1950s through the 1980s, and are therefore likely a¤ected by price and wage controls, in ‡ationary oil price hikes and the role played by …scal policy in driving output and in ‡ation (the underlying theory requires that monetary shocks dominate). We calculate new measures of the Phillips curve slope using data from 1981-98, a period during which these factors were arguably less important. Regressions based on the new measures indicate that the Phillips curve slope increases with trade openness amongst countries maintaining ‡exible and semi- ‡exible exchange rate regimes, but is unrelated to openness amongst countries maintaining …xed exchange rate regimes.

Implications of Globalization for the Output-inflation Relationship: an Assessment

“…Our sacrifice ratio data are taken from Bowdler (2009), where the data set is extended to cover 1973 through 2004. Bowdler in turn computes the sacrifice ratio from the seminal work of Ball (1994), where the data are taken from the International Monetary Fund's International Financial Statistics.…”

“…Consequently, there is less scope for increased openness simultaneously to yield consonant effects. Various authors have proposed potential roles for factors alongside globalization, including political regimes (Caporale and Caporale, 2008), costs of international trade and expenditure-switching effects (Cavelaars, 2009), exchangerate regimes (Bowdler, 2009), labor-market structures (Bowdler and Nunziata, 2010), and the extent of exchange-rate pass through (Daniels and VanHoose, 2013). Pickering and Valle (2012) provide another view on the effect of increased globalization on the output-inflation relationship.…”

The price-price Phillips curve in small open economies and monetary unions: theory and empirics

“…9 As a result, consumption smoothing can be achieved andĉ t = 0. Therefore, (15) turns out to beP t =M t + { t . Under these assumptions, by following a very similar procedure to that set out in the Appendix, it is possible to show that (19) does not change.…”

“…This variable -considering the di¤erential between actual and potential output -is also interesting for short-run analyses. This is not so for the variable adopted in Bowdler (2009) and Daniels and Van Hoose (2013) where reductions in trend output are considered. The former study found, in a sample of 41 countries running from 1981 to 1998, a weak negative correlation of sacri…ce ratios with openness, which is not a¤ected by the kind of exchange rate regime in place.…”

Trade Openness, Capital Mobility, and the Sacrifice Ratio

“…This finding is obviously at odds with a standard Barro and Gordon (1983) interpretation, although have provided a theoretical rationale for how increased trade openness could both raise the sacrifice ratio and reduce Daniels, VanHoose 2 equilibrium inflation when imperfectly competitive product markets are included in an openeconomy Barro-Gordon analysis. Furthermore, Bowdler (2004) suggests that the nature of the trade openness-sacrifice ratio relationship may depend on the exchange-rate regime that is in place.…”