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Openness, Imported Commodities and the Sacrifice Ratio
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Andrew Pickering
Published/Copyright:
March 20, 2012
Romer [1993] hypothesized that the output cost of a disinflation (the sacrifice ratio) falls with trade openness. Subsequent empirical work in many instances finds the reverse. We theorize that the sacrifice ratio increases with openness in production. When the production process is more open then changes in output lead to smaller changes in marginal costs, because costs are to a greater extent driven by exogenous factors. As a result price responses to output fluctuations are dampened and the output-inflation trade-off increases. Empirical evidence supports the hypothesis that greater imported commodity intensity in production increases the sacrifice ratio. Consistent with theory this relationship is stronger in fixed exchange rate regimes. Controlling for imported commodity intensity also leads to a finding of a significant negative impact of trade openness on the sacrifice ratio, consistent with Romer's original hypothesis.
Published Online: 2012-3-20
©2012 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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- Who Gets the Credit? And Does It Matter? Household vs. Firm Lending Across Countries
- How Much Did the 2009 Australian Fiscal Stimulus Boost Demand? Evidence from Household-Reported Spending Effects
- Economic Growth and Political Survival
- Exchange Rate Uncertainty and Trade
- Monetary and Macroprudential Policy Rules in a Model with House Price Booms
- A Unified Framework for Using Micro-Data to Compare Dynamic Time-Dependent Price-Setting Models
- Government Policy Response to War-Expenditure Shocks
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