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Openness and Inflation

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  • Cooke, Dudley

Abstract

A general equilibrium model of a small open economy is developed to analyse the optimal rate of inflation under discretion. Once agents' welfare is the sole policy objective it is possible to show that openness and inflation no longer have a simple inverse relationship. A greater degree of openness may lead the policy maker to want to exploit the short-run Phillips curve more aggressively, even if involves a smaller short-run benefit, because changes in export demand affect the terms of trade. Inflation can then be higher in a more open economy.

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  • Cooke, Dudley, 2006. "Openness and Inflation," Economics Discussion Papers 8907, University of Essex, Department of Economics.
    • Handle: RePEc:esx:essedp:8907
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