Capital Mobility and the Output-Inflation Tradeoff

Global Evidence from Usage Data

Author: Assaf Razin, Mr. Prakash Loungani, and Chi-Wa Yuen

Identifying determinants of the output-inflation tradeoff has long been a key issue in business cycle research. We provide evidence that in countries with greater restrictions on capital mobility, a given reduction in the inflation rate is associated with a smaller loss in output. This result is shown to be consistent with theoretical presumption from a version of the Mundell-Fleming model. Restrictions on capital mobility are measured using the IMF's Annual Report on Exchange Rate Arrangements and Exchange Restrictions. Estimates of the output-inflation tradeoff are taken from previous studies, viz., Lucas (1973) and Ball, Mankiw and Romer (1988).

Volume/Issue: Volume 2000 Issue 087

Publication date: May 2000

ISBN: 9781451851014

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Topics covered in this book

This title contains information about the following subjects. Click on a subject if you would like to see other titles with the same subjects.

Business and Economics , Exports and Imports , Inflation , WP , Phillips curve , Output-inflation tradeoff , capital mobility , capital controls , openness , immobility case , price level , mobility regime , aggregate demand elasticity , capital immobility , Real exchange rates , Inflation , Neoclassical theory , Trade balance , Africa

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Summary

Identifying determinants of the output-inflation tradeoff has long been a key issue in business cycle research. We provide evidence that in countries with greater restrictions on capital mobility, a given reduction in the inflation rate is associated with a smaller loss in output. This result is shown to be consistent with theoretical presumption from a version of the Mundell-Fleming model. Restrictions on capital mobility are measured using the IMF’s Annual Report on Exchange Rate Arrangements and Exchange Restrictions. Estimates of the output-inflation tradeoff are taken from previous studies, viz., Lucas (1973) and Ball, Mankiw and Romer (1988).