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TRADE OPENNESS, MARKET COMPETITION, AND INFLATION: SOME SECTORAL EVIDENCE FROM OECD COUNTRIES
Author(s) -
Binici Mahir,
Cheung YinWong,
Lai Kon S.
Publication year - 2012
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1451
Subject(s) - openness to experience , economics , productivity , competition (biology) , inflation (cosmology) , monetary economics , international economics , empirical evidence , macroeconomics , psychology , social psychology , ecology , philosophy , physics , epistemology , biology , theoretical physics
ABSTRACT This study evaluates the role market competition plays in determining inflation based on sector‐level data from OECD countries. In theory, trade openness can affect inflation through changes in market competitiveness and productivity. Nonetheless, previous empirical studies often fail to account for productivity effects, and their results may overstate the role of market competition. This study shows that inflation decreases with greater market competitiveness even after controlling for productivity effects. Indeed, when market competition and productivity effects are both accounted for, trade openness becomes insignificant in explaining inflation. The results support that changes in market competitiveness and productivity are the main channels through which trade openness affects inflation. Copyright © 2012 John Wiley & Sons, Ltd.