Inflation, Openness, and Exchange-Rate Regimes. The Quest for Short-Term Commitment

This paper further tests Romers (1993) extension of Kydland and Prescotts (1977) predictions on dynamic-inconsistency problems with regard to open economies. In a panel data set, I find that openness does not seem to play a role in the short run in restricting inflation, but a fixed exchange-rate regime plays a significant role. This result is robust to the use Reinhart and Rogoffs (2002) exchange rate regime classification. If the openness-inflation relationship arises from the dynamic inconsistency of discretionary monetary policy, the relationship is weaker in countries with fixed exchange-rate regimes.

Inflation, Openness, and Exchange-Rate Regimes