Working Paper: CEPR ID: DP6346
Authors: Janine Aron; John Muellbauer
Abstract: It is difficult to obtain reliable measures of evolving openness to trade, despite its relevance to models of growth, inflation and exchange rates. Our innovative technique measures trade openness encompassing both observable trade policy (tariffs and surcharges) and unobservable trade policy (quotas and other non-tariff barriers), and such factors as capital controls, sanctions and dual exchange rates (often used in composite trade measures). The share of manufactured imports in home demand for manufactured goods is estimated in STAMP (Koopman et al., 2000) using measured trade policy and controlling for fluctuations in domestic demand, relative prices of imports and the exchange rate. The unmeasured trade policy component is captured by a smooth non-linear stochastic trend. The two elements of openness, the stochastic trend and the rates of tariffs and surcharges, are included in a model of wholesale price inflation in South Africa. The evidence suggests that increased openness has significantly reduced the mean inflation rate and has reduced the exchange rate pass-through into wholesale prices.
Keywords: inflation dynamics; modelling; inflation; trade openness
JEL Codes: C22; E31; F13; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased trade openness (F19) | Reduced mean inflation rate (E31) |
| Increased trade openness (F19) | Reduced exchange rate passthrough into wholesale prices (E31) |
| Increased trade openness (F19) | Lower domestic prices (P22) |
| Lower domestic prices (P22) | Reduced mean inflation rate (E31) |
| Reduced exchange rate passthrough into wholesale prices (E31) | Reduced mean inflation rate (E31) |
| Increased trade openness (F19) | Decreased markup on costs charged by manufacturers (L11) |
| Decreased markup on costs charged by manufacturers (L11) | Reduced mean inflation rate (E31) |