INFLATION VOLATILITY, QUALITY OF INSTITUTIONS, AND OPENNESS

The inflation instability creates destruction on the economy not only concerning change in prices but also over rising in the level of prices instability. The purpose of this paper is to investigate the relationship between inflation volatility, openness, and quality of institutions for the panel of 182 economies, OECD, and Non-OECD economies for the period of 1998 to 2018. The paper found that institutional quality has a significant impact on inflation volatility. It also suggests political stability and the absence of violence, regulatory quality, and rule of law dampen the inflation volatility of OECD. However, government effectiveness increases the inflation volatility in non- OECD economies. Trade openness reduces the inflation volatility of OECD conversely increases inflation volatility of non-OECD economies. The volatility of inflation of OECD and non-OECD can be improved by a low exchange rate. The policy implications are central banks do use measures internally and emphasize the stability of headline inflation rates over the medium term. It has to be taken into consideration that institutional quality influences average inflation rates.