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立 政 治 大 學
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Lin and Chen (2010) use the panel data in 1973-2007 to explore the rela-tionship between openness and inflation. They argue that the characteristic of inflation is right-skewed and it will be influenced by outliers, so they apply QR for panel data of Koenker (2004) to their empirical work. After they do the empirical work between openness and inflation with QR, they find that when the quantile is higher the negative effect of openness on inflation be-comes stronger. Furthermore, when they add the exchange rate regime to the empirical work between openness and inflation, they find that the negative relationship between openness and inflation is not affected by exchange rate regime.
2.2 The Openness and Sacrifice Ratio
Despite the relationship that exists between openness and inflation, an im-portant theoretical mechanism that affects these two topics was established by Romer (1993) and is the relationship between openness and the output-inflation tradeoff. Romer (1993) argues that greater openness will cause the output-inflation tradeoff to fall and reduce the incentive for monetary authori-ties to inflate. It implies that the output-inflation tradeoff should be negatively related to openness. Ball (1994) selected disinflation periods as his sample pe-riod to build the data set and calculated the sacrifice ratio (or output-inflation tradeoff) for 19 OECD countries. Because the annual output data are avail-able in only some of the countries, Ball (1994) calculated both the quarterly data and the annual data. The denominator of the sacrifice ratio is the change in trend inflation and the numerator is the sum of the output losses. Where the change in trend inflation refers to the differences between inflation at the peaks and troughs, and the sum of the output losses stand for the deviations between actual output and its full employment or trend level. When calculat-ing the trend inflation in quarter t, Ball (1994) uses the average of inflation
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國立 政 治 大 學
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from t − 4 through t + 4. By using the quarterly and annual data, his basic empirical result shows that the coefficient of openness on the sacrifice ratio is positive in quarterly data and negative in annual data, but they are not sig-nificant. These empirical results cause Ball (1994) to doubt the argument of Romer (1993) that openness reduces inflation by changing the output-inflation tradeoff.
Temple (2002) uses a variety of measures of the output-inflation tradeoff to test the relationship between openness and the output-inflation tradeoff.
When he considers the data set calculated by Ball (1994) to examine the re-lationship between trade openness and output-inflation tradeoff, his empirical results show that the coefficient of openness is negative but insignificant. For a further check on this empirical work, Temple (2002) also used data calculated by Jordan (1997), and he considered the same time periods as Ball (1994).
Jordan (1997) calculated the “benefit ratio” by using the gain in output as a numerator and increasing inflation as a denominator. After applying the data of Jordan (1997) to the empirical work, the effect of openness on the bene-fit ratio is negative and insignificant. Even more, Ball, Mankiw, and Romer (1988) have estimated the output-inflation tradeoff for a large number of devel-oping and developed countries to make a study of New Keynesian Economics.
Temple (2002) takes the data set of Ball, Mankiw, and Romer (1988) into account, and the empirical results show that the coefficient of openness is pos-itive and insignificant. By using these three kinds of output-inflation tradeoff data, Temple (2002) doesnot find a robust relationship between openness and the output-inflation tradeoff. He argues that the correlation of openness and inflation is something of a puzzle, and he argues that it became a little harder to explain the negative relationship between trade openness and inflation in terms of time consistency models.
Danels, Nourzad, and VanHoose (2005) use the output-inflation tradeoff
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calculated by Ball (1994) and the regression models formed by Temple (2002) in their research, and they take the degree of central bank independence and the interaction term involving central bank independence and trade openness into account. Their empirical work shows two different aspects from Temple (2002): First is that trade openness has a positive and significant effect on the output-inflation tradeoff. Second, the R-square value is much higher than the values obtained by Temple (2002). Danels, Nourzad, and VanHoose (2005) also find that the coefficient of central bank independence is positive and sig-nificant. Their empirical results show that a more independent central bank should be associated with a larger sacrifice ratio. Additionally, the coefficient of interaction term between central bank independence and trade openness is negative and significant, and it reflects that trade openness will reduce the effect of central bank independence on sacrifice. According to the empirical results of Danels, Nourzad, and VanHoose (2005), they emphasize the role of central bank independence when dealing with empirical work about the sacri-fice ratio. They argue that the Barro-Gordan framework stresses too much on the interaction between openness and the output-inflation tradeoff, and they quote the theoretical interpretations of Danels and VanHoose (2006) and Razie and Yuen (2002) to emphasize “the importance of an imperfectly competitive goods markets and the degree of nominal wage rigidity rising due to inflation reduction generated by increased openness and central bank independence”.
Danels and VanHoose (2009) develope a theoretical model of an open eco-nomic that trades openness and capital mobility as having a positive effect on the sacrifice ratio, and they use the data from Ball (1994) to deal with their empirical work. Consistent with their theoretical model, their empirical results show that the trade openness and capital mobility have positive and signifi-cant effects on the output-inflation tradeoff respectively. They also find that greater wage duration enhances the positive effect of capital mobility on the
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sacrifice ratio. Overall, their empirical results of cross-sectional data are con-sistent with the theoretical model that the two forms of globalization include trade openness and capital mobility and they tend to have positive effects on the sacrifice ratio.
In addition to exploring the relationship between openness and inflation, Badinger (2009) tries to test the theoretical mechanism inference of Romer (1993) that openness affects inflation. He uses the same data set as the em-pirical work between openness and inflation to discuss the effect of openness on output-inflation tradeoff and to identify the channel that openness affects inflation. To obtain the data of the output–inflation tradeoff, Badinger (2009) follows Lucas (1973) to estimate the average output-inflation tradeoff. He defines openness as trade openness and financial openness, and his empirical results show that the coefficient of trade openness is positive and insignificant and the coefficient of financial openness is positive and significant. But after he placed a statistical hypothesis that the coefficient of trade openness and fi-nancial openness are the same, the coefficient became positive and significant.
The empirical results between openness and the output-inflation tradeoff is in-consistent with the Barro-Goden framework which was interpreted by Romer (1993), but it had a uniform result with the theoretical model of Danels and VanHoose (2006, 2009) and Razin and Loungani (2007). Razin and Loungani (2007) developed a new Keynesian open economic model which showed that globalization induces the policy maker to place more emphasis on reducing inflation than on narrowing the output gap in their model, and, therefore, both openness and capital flows have a positive effect on the output-inflation tradeoff.
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