Openness and Inflation. Xuefeng Qin (Jerry)

Transcription

1 Openness and Inflation Xuefeng Qin (Jerry)

2 Meaning of openness In Openness and Inflation: Theory and Evidence Author(s): David Romer s article (1993) Openness is measured as the average share of imports in GDP or GNP over the year Import / GDP = openness ratio In the recently year, we use foreign trade degree of dependence to measured country economic openness

3 What is Inflatio n? Meaning of inflation In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises. Each unit of currency buys fewer goods and services Consequently, inflation also reflects erosion in the purchasing power of money

4 Definition of inflation An increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices: it may be caused by an increase in the volume of paper money issued or of gold mine, or a relative increase in expenditures as when the supply of goods fails to meet the demand Inflation occurs when general level of price & cost are rising

5 Inflation redistributes the social conditions of people CAUSES OF INFLATION Factors on Demand side : 1. Increase in Money Supply 2. Increase in Disposable Income 3. Deficit Financing 4. Foreign exchange reserves Factors on Supply Side : 1. Rise in administered prices 2. Erratic agricultural growth 3. Agricultural price policy 4. Inadequate industrial growth Built-in inflation ((CPI Year 2 CPI Year 1) / (CPI Year 1))* 100%= Inflation rate Printing Of Money is never a Solution for Inflation

6 In reality, low inflation rate and an upward economic growth is never possible. Nevertheless, low inflation rate means slow economic growth. Whenever, money is in excess, there is bidding by the consumers due to which the cost of goods escalate.

7 The Advantages of Inflation: Disadvantages of Inflation: Deflation (a fall in prices negative inflation) is very harmful Moderate inflation enables adjustment of wages Inflation enables adjustment of relative prices Inflation can boost growth o Inflationary growth tends to be unsustainable leading to a damaging period of boom and bust economic cycles o Inflation tends to discourage investment and long term economic growth o Inflation can make an economy uncompetitive o Reduce value of savings. Inflation leads to a fall in the value of money o Menu costs costs of changing prices lists which becomes more frequent during high inflation

8 Hyperinflation in Republic of Zimbabwe Zimbabwe central bank issues Zimbabwe dollars to pay debt In 2009, Zimbabwe abandoned its currency. As of 2014, Zimbabwe still has no national currency; currencies from other countries are used

9 Literature & Data (Triffin and Grubel, 1962) is the earlist reseach with openness and inflation. They have identified negative effects of trade openness on inflation In kydland and prescott [1977] classic paper demonstate that the absencce of precommitment in monetary police can lead to inefficiently high inflation Rogoff (1985) notes that surprise monetary expansion cause the real exchange rate to depreciate, and that this reduce the incentives to undertake expansion David Romer use different way to estimate relationship between Inflation & Openness 114 contries estimated, and he used average inflation since 1973 and 1980 real income per capita

10 Political instability & Central bank dependence

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12 Inflation = B0+B1open+B2log(pcinc)+U

13 Extesion estimate Open=B0 + B1log(pcinc) + B2log(land) + u These results shows that the smaller countries are more open.

14 Conclusion: This paper demonstrates that average rates of inflation are lower in smaller, more open economies. This relationship is statistically significant, quantitatively large, and robust. It holds over a wide range of countries, with the exception of a small group of highly developed countries in which average inflation rates are low and unrelated to openness. The relationship is stronger in countries that are less politically stable and have less independent central banks. Finally, the relationship accounts for a moderate amount of the overall cross-country variation in average inflation rates

15 CPI(Inflation) in China

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18 Expansionary Fiscal Policy During 2008 world Financial Crisis, the Chinese economic stimulus plan (increasing Government spending ) State Council of China had approved a plan to invest 4 trillion yuan in infrastructure and social welfare by the end of This stimulus, equivalent to US$586 billion