Financial Openness and Inflation: Recent Evidence

Vol: 
02/2023
Author name: 
Guender AV
McHugh-Smith H
Year: 
2023
Month: 
January
Abstract: 

In a model comprising a bank and goods-producing firm, this paper advances the hypothesis that financial openness should be inversely related to the rate of inflation. Our empirical analysis reveals a strong and robust inverse link between financial openness and CPI inflation in over 100 countries over the 1997-2016 period, adding weight to the argument that inflation in financially open economies is indeed lower. This result obtains for OECD countries as well as non-OECD countries. Trade openness in contrast bears no systematic relationship to inflation.

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