Inflation, openness, and exchange-rate regimes - The quest for short-term commitment

This paper further tests Romer's [Romer, D., 1993. Openness and inflation: theory and evidence. Quarterly Journal of Economics 58, 869-903] extension of Kydland and Prescott's [Kydland, F., Prescott, E., 1977. Rules rather than discretion: the inconsistency of optimal plans. Journal of Political Economy 85, 473-491] predictions for dynamic inconsistency problems in open economies. In a panel data set of developed and developing countries from 1973 to 1998, 1 find that openness does not play a role in restricting inflation in the short run. On the other hand, a fixed exchange-rate regime plays a significant role. The results are robust to controlling for other variables that determine inflation, performing sensitivity analysis, and using a de facto exchange-rate regime classification. (c) 2005 Elsevier B.V. All fights reserved.