•  
  •  
 

Journal of Undergraduate Research

Keywords

inflation, Bretton-Woods Agreement, international trade

College

Family, Home, and Social Sciences

Department

Economics

Abstract

Since the collapse of the Bretton-Woods Agreement in 1973, inflation rates have been steadily decreasing in most of the developed world. At the same time, countries have become increasingly open to international trade (see Figure 1). A possible explanation is that openness to trade and inflation are negatively correlated. This relationship is predicted in a highly-cited theoretical model by economist Kenneth Rogoff (1985) and in most of the previous literature on the subject. However, a more recent theoretical paper (Evans 2012) predicts that countries may engage in inflationary policy in order to tax foreign holders of domestic currency. As countries increase in openness, the inflation tax becomes an increasingly attractive option. Critical to this insight is the level of imperfect competition within the country, as imperfect competition dampens the incentive of central banks to inflate. Knowing the extent to which countries actually use this inflation tax has important policy implications. For example, if countries regularly engage in this practice then other countries may be hesitant to hold foreign currencies, which could cause inefficiencies in international trade.

Download

Included in

Economics Commons

Share

COinS