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Issue Q2 2012  
Does Greater Economic Openness Grasp the Elements of Inflation 'Surprise'? New Evidence Using Panel Data Techniques  
Sarfaraz Ali Shah Syed
This study brings new evidence on the relationship between openness and inflation. We estimate the impact of globalization on inflation in both developed and developing countries, and going further for different regional clusters. The results show that increased openness has without doubt the elements of inflation surprise.We find a negative opennessinflation relationship in developed economies, and confirm the earlier results from the literature. However, studying this relationship for developing economies we find evidence of the surprise, although it is meagre. In this case, African economies appear to be the outlier. Nonetheless, despite the mixed impact of globalization on inflation, it does not allow for inflation-targeting central banks to enjoy any escape clause. A pre-commitment by the central banks would redesign the loss function in a way, which besides directly gauging the determinants of inflation, would also act as a warning for a potential over-heating of the economy. Abstract

Inflation ; Globalization ; Trade Openness ; Keywords
C23 ; E61 ; F15 ; JEL classification
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