Inflation and openness with non-atomistic wage setters

This paper analyses the impact of trade openness on inflation in a strategi c framework characterised by monopolistic production in the domestic sector and unionised labour markets. By stressing the interplay between internal and external sources of economic distortion, we show that the economy's inf lationary bins reduces zip to a critical level of trade openness. Beyond th is threshold, wage setters may be induced to behave more aggressively in op en economies, leading to higher equilibrium inflation. Based on a I egressi on analysis that investigates the combined effect of labour market institut ions and openness on inflation across nineteen OECD economies, we show that inflation is negatively related to openness when wage bargaining is decent ralised, while there is virtually no link between openness and inflation at higher levels of wage centralisation.