Convex Phillips Curve Explaining Openness and Inflation Nexus


We study the theoretical nexus between inflation and trade openness in the presence of a non-linear Phillips curve. Phillips curve explains the inverse relationship between unemployment and inflation; however, the open economy macroeconomic models usually propose that the slope of the trade-off should be related to the extent of trade openness. The role of openness as a check on inflation has recently attracted attention of many [1]. The parallelism between the recent globalization wave and the fall in inflation has led to a perception that the determinants of the slowdown in inflation were not only the domestic ones but could partly be due to increased trade openness. This study describes this relationship considering a non-linear Phillips curve. Using the conventional Phillips curve approximated by Cobb-Douglas model we confirm the earlier observations regarding the existence of a significant impact of openness on inflation. The interesting contribution of this study is not only to establish the trade-openness and inflation nexus but also to identify the relevant channels through which openness impacts inflation. Our model predicts that in the current scenario of increased openness a non-linear symmetric loss function may still prevail, but for the policy purposes it necessitates to consider domestic and foreign propensities to import and the exchange rate sensitivity to inflation. In addition, the integration of the international markets would result into an even more important role of exchange rate dynamics as a response to the rising international trade. We find that in the presence of a convex Phillips curve any upward variation in the foreigners’ propensity to import would place a downward pressure on domestic inflation, provided that the current and the lagged rate of unemployment are less than minimum unemployment rate. Our model, while assessing the short run dynamics, also suggests that increased openness results into a complex divide among different economies, due to their sizes and structures. Investigating such a relationship as an extension of this study for different economic groups could reveal further interesting facts.

Share and Cite:

Syed, S. and Zwick, H. (2015) Convex Phillips Curve Explaining Openness and Inflation Nexus. Theoretical Economics Letters, 5, 739-748. doi: 10.4236/tel.2015.56086.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] Romer, D. (1993) Openness and Inflation: Theory and Evidence. The Quarterly Journal of Economics, 108, 869-903.
[2] Badinger, H. (2009) Globalization, the Output-Inflation Trade-Off and Inflation. European Economic Review, 53, 888-907.
[3] Ball, L. (2006) Has Globalization Changed Inflation? NBER Working Paper Series 12687.
[4] Temple, J. (2002) Openness, Inflation, and the Phillips Curve: A Puzzle. Journal of Money, Credit and Banking, 34, 450-468.
[5] Kuttner, K. and Robinson, T. (2010) Understanding the Flattening Phillips Curve. The North American Journal of Economics and Finance, 21, 110-125.
[6] Beaudry, P. and Doyle, M. (2000) What Happened to the Phillips Curve in the 1990s in Canada? Proceedings of Bank of Canada, Price Stability and the Long-Run Target for Monetary Policy, 51-82.
[7] Ball, L., Mankiw, N.G. and Romer, D. (1988) The New Keynesian Economics and the Output-Inflation Trade-Off. Brookings Papers on Economic Activity, 1988, 1-82.
[8] Bakshi, H., Khan, H. and Rudolf, B. (2004) The Phillips Curve under State Dependent Pricing. Bank of England, Working Paper, 227.
[9] Levin, A. and Piger, J. (2004) Is Inflation Persistence Intrinsic in Industrial Economies? Federal Reserve Bank of St. Louis, Working Paper 2002-023.
[10] Roberts, J.M. (2006) Monetary Policy and Inflation Dynamics. International Journal of Central Banking, 2, 193-230.
[11] Williams, J.C. (2006) Inflation Persistence in an Era of Well-Anchored Inflation Expectations. FRBSF Economic Letter, No. 2006-27.
[12] Mishkin, F.S. (2007) Inflation Dynamics. International Finance, 10, 317-334.
[13] Syed, S.A.S. (2012) Does Greater Economic Openness Grasp the Elements of Inflation “Surprise”? New Evidence Using Panel Data Techniques. International Economics, 130, 33-59.
[14] Borio, C. and Filardo, A. (2006) Globalization and Inflation: New Cross-Country Evidence on the Global Determinants of Domestic Inflation. Working Paper 227, Bank for International Settlements, Basel.
[15] Tambakis, D. (2009) Optimal Monetary Policy with a Convex Phillips Curve. The B.E. Journal of Macroeconomics, 9, 1-25.
[16] Clark, P., Laxton, D. and Rose, D. (1996) Asymmetry in the US Output-Inflation Nexus. IMF Staff Papers, 43, 216-251.
[17] Macklem, T. (1996) Asymmetry in the Monetary Transmission Mechanism: What Can We Learn from VARS? Unpublished Manuscript, Bank of Canada Working Paper.
[18] Barro, R.J. and Gordon, D.B. (1983) Rules, Discretion and Reputation in a Model of Monetary Policy. Journal of Monetary Economics, 12, 101-121.
[19] Shapiro, C. and Stiglitz, J. (1984) Equilibrium Unemployment as a Worker Discipline Device. American Economic Review, 72, 433-444.
[20] Debelle, G. and Laxton, D. (1996) Is the Phillips Curve Really a Curve? Some Evidence for Canada, the United Kingdom, and the United States. IMF Working Paper, 96/111.
[21] Laxton, D., Rose, D. and Tambakis, D. (1999) The US Phillips Curve: The Case for Asymmetry. Journal of Economic Dynamics and Control, 23, 1459-1485.
[22] Loungani, P. and Razin, A. (2005) Globalization and Disinflation: The Efficiency Channel. CEPR Discussion Paper 4895.
[23] IMF (2006) World Economic Outlook—April 2006. World Economic and Financial Surveys, Globalization and Inflation.
[24] Crowe, C. and Meade, E. (2007) The Evolution of Central Bank Governance around the World. Journal of Economic Perspectives, American Economic Association, 21, 69-90.
[25] Lane, P.R. (1997) Inflation in Open Economies. Journal of International Economics, 42, 327-347.
[26] Daniels, J. and Van Hoose, H. (2006) Openness, the Sacrifice Ratio, and Inflation: Is There a Puzzle? Journal of International Money and Finance, 25, 1336-1347.
[27] Phillips, A. (1958) The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom 1861-1957. Economica, 25, 283-299.
[28] Daniels, J. and VanHoose, D. (2013) Exchange-Rate Pass Through, Openness, and the Sacrifice Ratio. Journal of International Money and Finance, 36, 131-150.
[29] Rogoff, K. (2006) Impact of Globalization on Monetary Policy. Proceedings of the Symposium on the New Economic Geography: Effects and Policy Implications, Jackson Hole, 24-26 August 2006.

Copyright © 2022 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.