Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-14T07:26:25.328Z Has data issue: false hasContentIssue false
  • English
  • Français

GLOBALIZATION AND INFLATION: NEW PANEL EVIDENCE

Published online by Cambridge University Press:  21 April 2015

Dong-Hyeon Kim ,
Shu-Chin Lin  and
Yi-Chen Wu
Dong-Hyeon Kim
Affiliation:
Korea University
Shu-Chin Lin*
Affiliation:
Tamkang University
Yi-Chen Wu
Affiliation:
National Central University
*
Address correspondence to: Shu-Chin Lin, Department of Economics, Tamkang University, 151 Yingzhuan Rd., Danshui Dis., New Taipei City 25137, Taiwan; e-mail address: e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

Recent empirical work on globalization and inflation analyzes multicountry data sets in panel and/or cross-section frameworks and reaches inconclusive results. This paper highlights their shortcomings and reexamines the issue utilizing heterogeneous panel cointegration techniques that allow for cross-section heterogeneity and dependence. It finds that in a sample of developing countries globalization of both trade and finance, on the average, exerts a significant and positive effect on inflation, whereas in a sample of developed countries there is, on the average, no significant impact of openness. Neither type of openness disciplines inflationary policy. Despite this, there are large variations in the effect across countries, due possibly to differences in the quality of political institutions, central bank independence, the exchange-rate regimes, financial development, and/or legal traditions.

Keywords

Trade OpennessFinancial OpennessInflationCross-Section DependenceHeterogeneous Panels
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 1 , January 2016 , pp. 1 - 26
Copyright
Copyright © Cambridge University Press 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Acemoglu, D., Johnson, S., Querubin, P., and Robinson, J.A. (2008) When does policy reform work? The case of central bank independence. Brookings Papers on Economic Activity, 351–429.CrossRefGoogle Scholar
Acemoglu, D., Johnson, S., and Robinson, J.A. (2001) The colonial origins of comparative development: An empirical investigation. American Economic Review 91, 1369–1401.CrossRefGoogle Scholar
Adam, C. and Cobham, D. (2007) Exchange rate regimes and trade. Manchester School 75, 44–63.CrossRefGoogle Scholar
Aghion, P., Bacchetta, P., and Banerjee, A. (2004) Financial development and the instability of open economies. Journal of Monetary Economics 51, 1077–1106.CrossRefGoogle Scholar
Aghion, P., Bacchetta, P., Rancière, R., and Rogoff, K. (2009) Exchange rate volatility and productivity growth: The role of financial development. Journal of Monetary Economics 56, 494–513.CrossRefGoogle Scholar
Aghion, P., Banerjee, A., and Piketty, T. (1999) Dualism and macroeconomic volatility. Quarterly Journal of Economics 14, 1359–1397.CrossRefGoogle Scholar
Aizenman, J. (2004) Financial openness and development: Evidence and policy controversies. American Economic Review Papers and Proceedings 94, 65–70.CrossRefGoogle Scholar
Aizenman, J. (2008) On the hidden links between financial and trade opening. Journal of International Money and Finance 27, 372–386.CrossRefGoogle Scholar
Aizenman, J. and Noy, I. (2009) Endogenous financial and trade openness. Review of Development Economics 13, 175–189.CrossRefGoogle Scholar
Alfaro, L. (2005) Inflation, openness, and exchange-rate regimes: The quest for short-run commitment. Journal of Development Economics 77, 229–249.CrossRefGoogle Scholar
Alfaro, L., Chanda, A., Kalemli-Ozcan, S., and Sayek, S. (2004) FDI and economic growth: The role of local financial markets. Journal of International Economics 64, 89–112.CrossRefGoogle Scholar
Arellano, M. and Bond, S.R. (1991) Some tests of specification for panel data. Review of Economic Studies 58, 277–297.CrossRefGoogle Scholar
Badinger, H. (2009) Globalization, the output–inflation tradeoff and inflation. European Economic Review 53, 888–907.CrossRefGoogle Scholar
Bai, J. (2009) Panel data models with interactive fixed effects. Econometrica 77, 1229–1279.Google Scholar
Ball, L.M. (2006) Has Globalization Changed Inflation? NBER working paper 12687.CrossRefGoogle Scholar
Barro, R.J. (1999) Determinants of democracy. Journal of Political Economy 107, 1–27.CrossRefGoogle Scholar
Beck, T. (2003) Financial dependence and international trade. Review of International Economics 11, 296–316.CrossRefGoogle Scholar
Beck, T., Demirguc-Kunt, A., and Levine, R. (2000) A new database on financial development and structure. World Bank Economic Review 14, 597–605.CrossRefGoogle Scholar
Bernhard, W. and Leblang, D. (1999) Democratic institutions and exchange-rate commitments. International Organization 53, 71–97.CrossRefGoogle Scholar
Blankenau, W., Kose, A.M., and Yi, K.-M. (2001) Can world real interest rates explain business cycles in a small open economy? Journal of Economic Dynamics and Control 25, 867–889.CrossRefGoogle Scholar
Bleaney, M. 1999. The Disappearing Openness–Inflation Relationship: A Cross-Country Analysis of Inflation Rate. IMF working paper.CrossRefGoogle Scholar
Bowdler, C. (2009) Openness, exchange rate regimes and the Phillips curve. Journal of International Money and Finance 28, 148–160.CrossRefGoogle Scholar
Calvo, G. and Reinhart, C.M. (2002) Fear of floating. Quarterly Journal of Economics 117, 379–408.CrossRefGoogle Scholar
Campos, N.F. and Coricelli, F. (2012) Financial liberalization and reversals: Political and economic determinants. Economic Policy 27, 483–513.CrossRefGoogle Scholar
Cavallari, L. (2001) Inflation and openness with non-atomistic wage setting. Scottish Journal of Political Economy 48, 210–225.CrossRefGoogle Scholar
Cavelaars, P. (2009) Does globalization discipline monetary policy? Journal of International Money and Finance 28, 392–405.CrossRefGoogle Scholar
Cecchetti, S.G. and Krause, S. (2001) Financial Structure, Macroeconomic Stability and Monetary Policy. NBER working papers 8354.CrossRefGoogle Scholar
Chowdhury, I., Hoffmann, M., and Schabert, A. (2006) Inflation dynamics and the cost channel of monetary transmission. European Economic Review 50, 995–1016.CrossRefGoogle Scholar
Chudik, A., Pesaran, M.H., and Tosetti, E. (2011) Weak and strong cross section dependence and estimation of large panels. Econometrics Journal 14, C45–C90.CrossRefGoogle Scholar
Coakley, J., Fuertes, A.-M., and Smith, R.P. (2006) Unobserved heterogeneity in panel time series models. Computational Statistics and Data Analysis 50, 2361–2380.CrossRefGoogle Scholar
Cooke, D. (2010) Openness and inflation. Journal of Money, Credit and Banking 42, 267–287.CrossRefGoogle Scholar
Cukierman, A. (2008) Central bank independence and monetary policymaking institutions: Past, present and future. European Journal of Political Economy 24, 722–736.CrossRefGoogle Scholar
Daniels, J.P., Nourzad, F., and VanHoose, D.D. (2005) Openness, central bank independence and the sacrifice ratio. Journal of Money, Credit and Banking 37, 371–379.CrossRefGoogle Scholar
Daniels, J.P. and VanHoose, D.D. (2006) Openness, the sacrifice ratio, and inflation: Is there a puzzle? Journal of International Money and Finance 25, 1336–1347.CrossRefGoogle Scholar
Desai, R., Olofsgard, A., and Yousef, T. (2003) Democracy, inequality, and Inflation. American Political Science Review 97, 391–406.CrossRefGoogle Scholar
Djankov, S., La Porta, R., Lopez-de-Silanes, F., and Shleifer, A. (2003) Courts. Quarterly Journal of Economics 118, 453–517.CrossRefGoogle Scholar
Dreher, A., Jan-Egbert Sturm, J., and de Haan, J. (2010) When is a central bank governor replaced? Evidence based on a new data set. Journal of Macroeconomics 32, 766–781.CrossRefGoogle Scholar
Eberhardt, M. and Teal, F. (2011) Econometrics for grumblers: A new look at the literature on cross-country growth empirics. Journal of Economic Surveys 25, 109–155.CrossRefGoogle Scholar
Eberhardt, M. and Teal, F. (2013) No mangos in the tundra: Spatial heterogeneity in agricultural productivity analysis. Oxford Bulletin of Economics and Statistics 75, 914–939.CrossRefGoogle Scholar
Egger, P. (2002) An econometric view on the estimation of gravity models and the calculation of trade potentials. World Economy 25, 297–312.CrossRefGoogle Scholar
Evans, R.W. (2012) Is openness inflationary? Policy commitment and imperfect competition. Journal of Macroeconomics 34, 1095–1110.CrossRefGoogle Scholar
Granger, C.W.J. (1997) On modelling the long run in applied economics. Economic Journal 107, 169–77.CrossRefGoogle Scholar
Gruben, W.C. and McLeod, D. (2002) Capital account liberalization and inflation. Economics Letters 77, 221–225.CrossRefGoogle Scholar
Gruben, W.C. and McLeod, D. (2004) The openness–inflation puzzle revisited. Applied Economics Letters 11, 465–468.CrossRefGoogle Scholar
Helpman, E. (2006) Trade, FDI, and the organization of firms. Journal of Economic Literature 44, 589–630.CrossRefGoogle Scholar
Hermes, N. and Lensink, R. (2003) Foreign direct investment, financial development and economic growth. Journal of Development Studies 40, 142–163.CrossRefGoogle Scholar
Hoffmann, M. and Tillmann, P. (2012) International financial integration and national price levels: The role of the exchange rate regime. Journal of International Money and Finance 31, 1503–1528.CrossRefGoogle Scholar
Im, K.S., Pesaran, M.H., and Shin, Y. (2003) Testing for unit roots in heterogeneous panels. Journal of Econometrics 115, 53–74.CrossRefGoogle Scholar
International Monetary Fund (2006) How has globalization affected inflation? In World Economic Outlook, Chap. III, April.Google Scholar
Kapetanios, G., Pesaran, M.H., and Yamagata, T. (2011) Panels with nonstationary multifactor error structures. Journal of Econometrics 160, 326–48.CrossRefGoogle Scholar
Karras, G. (1999) Openness and the effects of monetary policy. Journal of International Money and Finance 18, 13–26.CrossRefGoogle Scholar
Kim, D.-H. and Lin, S.-C. (2010) Dynamic relationship between inflation and financial development. Macroeconomic Dynamics 14, 343–364.CrossRefGoogle Scholar
Kim, D.-H., Lin, S.-C., and Suen, Y.-B. (2010) Are finance and trade complements or substitutes? Southern Economic Journal 76, 827–845.CrossRefGoogle Scholar
Klein, M. and Shambaugh, J.C. (2006) Fixed exchange rates and trade. Journal of International Economics 70, 359–383.CrossRefGoogle Scholar
Kose, M., Prasad, E.S., Rogoff, K., and Wei, S.-J. (2009) Financial globalization: A reappraisal. IMF Staff Papers 56, 8–62.CrossRefGoogle Scholar
Lane, P.R. (1997) Inflation in open economies. Journal of International Economics 42, 327–347.CrossRefGoogle Scholar
Lane, P.R. and Milesi-Ferretti, G.M. (2007) The external wealth of nations Mark II: Revised and extended estimates of foreign assets and liabilities, 1970–2004. Journal of International Economics 73, 223–250.CrossRefGoogle Scholar
La Porta, R., Lopez-de-Silanes, F., and Shleifer, A. (2008) The economic consequences of legal origins. Journal of Economic Literature 46, 285–332.CrossRefGoogle Scholar
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., and Vishny, R. (1999) The quality of government. Journal of Law, Economics and Organization 15, 222–279.CrossRefGoogle Scholar
Loayza, N.V. and Raddatz, C. (2007) The structural determinants of external vulnerability. World Bank Economic Review 21, 359–387.CrossRefGoogle Scholar
Marshall, M.G. and Jaggers, K. (2010) Polity IV Project Country Reports. CIDUM, University of Maryland.Google Scholar
McCaig, B. and Stengos, T. (2005) Financial intermediation and growth: Some robustness results. Economics Letters 88, 306–312.CrossRefGoogle Scholar
Meade, E. and Crowe, C. (2007) The evolution of central bank governance around the world. Journal of Economic Perspectives 21, 69–90.Google Scholar
Milner, H.V. and Kubota, K. (2005) Why the move to free trade? Democracy and trade policy in the developing countries. International Organization 59, 107–143.CrossRefGoogle Scholar
Nelson, C.R. and Plosser, C.I. (1982) Trends and random walks in macroeconomic time series: Some evidence and implications. Journal of Monetary Economics 10, 139–162.CrossRefGoogle Scholar
Nunn, N. (2007) Relationship-specificity, incomplete contracts and the pattern of trade. Quarterly Journal of Economics 122, 569–600.CrossRefGoogle Scholar
Obstfeld, M. (1998) The global capital market: Benefactor or menace? Journal of Economic Perspectives 12, 9–30.CrossRefGoogle Scholar
Pesaran, M.H. (2004) General Diagnostic Tests for Cross Section Dependence in Panels. University of Cambridge, Faculty of Economics, Cambridge working papers in economics 0435.CrossRefGoogle Scholar
Pesaran, M.H. (2006) Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica 74, 967–1012.CrossRefGoogle Scholar
Pesaran, M.H. (2007) A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics 22, 265–312.CrossRefGoogle Scholar
Pesaran, M.H., Haque, N.U., and Sharma, S. (2000) Neglected heterogeneity and dynamics in cross country savings. In Krishnakumar, J. and Ronchetti, E. (eds.), Panel Data Econometrics—Future Directions, pp. 58–82. Amsterdam: North-Holland (Elsevier Science).Google Scholar
Pesaran, M.H. and Smith, R. (1995) Estimating long-run relationships from dynamic heterogeneous panels. Journal of Econometrics 68, 79–113.CrossRefGoogle Scholar
Pesaran, M.H. and Tosetti, E. (2011) Large panels with common factors and spatial correlations. Journal of Econometrics 161, 182–202.CrossRefGoogle Scholar
Posen, A.S. (1995) Declarations are not enough: Financial sector sources of central bank independence. In NBER Macroeconomics Annual 10, pp. 253–274. National Bureau of Economic Research, Inc.Google Scholar
Ravenna, F. and Walsh, C.E. (2006) Optimal monetary policy with the cost channel. Journal of Monetary Economics 53, 199–216.CrossRefGoogle Scholar
Rodrik, D. (1998) Who needs capital account convertibility? In Fischer, S. (ed.), Should the IMF pursue capital-account convertibility? Essays in international finance, Issue 207, Department of Economics, Princeton University.Google Scholar
Rodrik, D. (2001) The Developing Countries' Hazardous Obsession with Global Integration. Kennedy School of Government, Harvard University.Google Scholar
Rogoff, K. (2003) Disinflation: An unsung benefit of globalization? Finance and Development 40, 55–56.Google Scholar
Rogoff, K. and Reinhart, C. (2004) The modern history of exchange-rate arrangements: A reinterpretation. Quarterly Journal of Economics 119, 1–48.Google Scholar
Romer, D. (1993) Openness and inflation: Theory and evidence. Quarterly Journal of Economics 108, 869–903.CrossRefGoogle Scholar
Spiegel, M.M. (2009) Financial globalization and monetary policy discipline: A survey with new evidence from financial remoteness. IMF Staff Papers 56, 198–221.CrossRefGoogle Scholar
Stiglitz, J. (1999) Reforming the global economic architecture: Lessons from recent crises. Journal of Finance 54, 1508–1521.CrossRefGoogle Scholar
Svaleryd, H. and Vlachos, J. (2002) Markets for risk and openness to trade: How are they related? Journal of International Economics 57, 369–395.CrossRefGoogle Scholar
Temple, J. (2002) Openness, inflation, and Phillips curve: A puzzle. Journal of Money, Credit and Banking 34, 450–468.CrossRefGoogle Scholar
Terra, C.T. (1998) Openness and inflation: A new assessment. Quarterly Journal of Economics 113, 641–648.CrossRefGoogle Scholar
Tillmann, P. (2008) Do interest rates drive inflation dynamics? An analysis of the cost channel of monetary transmission. Journal of Economic Dynamics and Control 32, 2723–2744.CrossRefGoogle Scholar
Winters, L.A. (2004) Trade liberalization and economic performance: An overview. Economic Journal 114, 4–21.CrossRefGoogle Scholar
World Bank (2012) World Development Indicators. Washington, DC: World Bank.Google Scholar
Yu, M. (2010) Trade, democracy, and the gravity equation. Journal of Development Economics 91, 289–300.CrossRefGoogle Scholar