Openness and the effects of monetary policy

Economic theory suggests that an economy's openness reduces the ability of monetary policy to affect output, while increasing its effects on inflation. Using annual data from the 1953-1990 period for a panel of 38 countries, the paper's empirical results support the theoretical predictions: the more open the economy, the smaller (larger) the output (inflation) effects of a given change in the money supply. This finding is robust across all the different specifications and estimation methods examined. (C) 1999 Elsevier Science Ltd. All rights reserved.