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A note on Romer's openness-inflation relation: the responsiveness of AS and AD to economic openness and monetary policy

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Temple (2002) empirically challenges Romer's (1993) negative openness-inflation relation on empirical grounds. This article links economic openness to the slopes of aggregate supply (AS) and aggregate demand (AD) to explain why the openness-inflation relation can be ambiguous. Starting with a widely used assumption initiated by Romer (1993) that more open economies face greater output inflation tradeoffs, we demonstrate that greater output-inflation tradeoffs in more open economies (reflected in the steeper AS) induce policymakers to adopt more aggressive optimal monetary policy (reflected in the flatter AD). Empirical results from 15 developed countries' data support our theoretical explanation on the recent empirical failure in finding the negative openness-inflation relation.
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Document Type: Research Article

Affiliations: 1: Center for Public Policy and Department of Political Science, University of Houston, TX, USA 2: College of Business, San Antonio, TX, USA 3: Department of Economics, University of San Francisco, San Francisco, CA, USA

Publication date: 2007-02-01

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