Is Openness Inflationary? Policy Commitment and Imperfect Competition

This paper proposes a channel through which increased openness to international trade can increase a country's long-run incentive to create inflation. The theoretical justifcation for this channel is the well known "beggar thy neighbor" incentive, and its dominance relies on a monetary authority's ability to commit to policy as well as the asymmetric effects of the underlying frictions in the model across domestic and foreign households. Comparing data from the 1973-1987 period and the 1988-2002 period, I Find evidence that the effect of openness on inflation is positive among developed countries whose monetary policy can be approximated by commitment and that the inflationary bias of openness is dampened by the degree of imperfect competition and the inelasticity of labor supply within the country.