Globalization and inflation-output tradeoffs
By: Assaf Razin, Prakash Loungani.
Contributors: Loungani, Prakash.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 11641; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 11641.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Globalization -- Economic aspects.; Fiscal policy.; Inflation (Finance)
Description: "We demonstrate how capital account and trade account liberalizations help reduce inefficiencies associated with the fluctuations in the output gap, relative to the inefficiencies associated with the fluctuations in inflation.  With capital account liberalization the representative household is able to smooth fluctuations in consumption, and thus becomes relatively insensitive to fluctuations in the output gap.  With trade liberalization the economy tends to specialize in production but not in consumption.  The correlation between fluctuations in the output gap and aggregate consumption is therefore weakened by trade openness; hence a smaller weight on the output gap in the utility-based loss function, compared to the closed economy situations. A key implication of the theory is that globalization forces could induce monetary authorities, to put a greater emphasis on reducing the inflation rate than on narrowing the output gaps.  We provide a re- interpretation of the evidence on the effect of openness on the sacrifice ratio which supports the prediction of the theory"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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