Openness and inflation volatility: Cross-country evidence

Abstract

Trade openness can affect inflation volatility via the incentives faced by policymakers\nor the structure of production and consumption, but the sign of this effect, as\npredicted from economic theory, is ambiguous. This paper provides evidence for a\nnegative effect of openness on inflation volatility using a dynamic panel model that\ncontrols for the endogeneity of openness and the effects of both average inflation and\nthe exchange rate regime. Our results offer one explanation for the recent decline in\ninflation volatility observed in many countries. The relationship is shown to be\nstrongest amongst developing and emerging market economies, and we argue that the\nmechanisms linking openness and inflation volatility are likely to be strongest\namongst this group of countries.\nKeywords: