Openness And The Output-Inflation Tradeoff: Floating Vs. Fixed Exchange Rates

The paper is an attempt to understand how globalization (in the form of opening up an otherwise closed economy to commodity trade and foreign investment) would interact with the exchange rate regime chosen by a small open economy to determine its output-inflation tradeoff. Based on the stochastic dynamic Mundell-Fleming model, our theory suggests that, under “normal” circumstances, the Phillips curve would be flatter under a fixed exchange rate regime. We also provide some empirical support based on Hong Kong data. [E2; F3]