The inflationary bias in a model of the open economy: a note

In this paper we highlight the importance of aggregate supply effects on th e size of the inflationary bias under discretionary policy-making. Using a simple model of an open economy that imports a foreign resource input, we s how that under discretion the inflationary bias bears an inverse relationsh ip to the elasticity of output supplied with respect to the real exchange r ate. This theoretical finding is consistent with Romer (1993) [Romer, D., 1 993. Openness and inflation: theory and evidence, Quarterly Journal of Econ omics 108, 869-903] empirical results that point to the existence of a nega tive association between openness and inflation. (C) 2000 Elsevier Science S.A. All rights reserved. JEL classification. E5; F4.