Inflation in open economies

This paper relates the time-consistent inflation rate to the degree of trade openness of an economy. The mechanism linking the welfare effects of monetary surprises (and hence the incentives to inflate) to openness does not rely on a large-country terms of trade effect but rather is due to imperfect competition and nominal price rigidity in the non-traded sector. The empirical evidence supports the main predictions of the model. (C) 1997 Elsevier Science B.V.