Article | Journal of Development Economics | June 2005

Inflation, Openness, and Exchange Rate Regimes

by Laura Alfaro

Abstract

This paper further tests Romer's (1993) extension of Kydland and Prescott's (1977) predictions for dynamic-inconsistency problems in open economies. In a panel data set of developed and developing countries from 1973 to 1998, I find that openness does not play a role in restricting inflation in the short-run. On the other hand, a fixed exchange-rate regime plays a significant role. The results are robust to controlling for other variables that determine inflation, performing sensitivity analysis, and using a de facto exchange-rate regime classification.

Keywords: Forecasting and Prediction; Economy; Currency Exchange Rate; Developing Countries and Economies; Inflation and Deflation;

Citation:

Alfaro, Laura. "Inflation, Openness, and Exchange Rate Regimes." Journal of Development Economics 77, no. 1 (June 2005).