TY - JOUR AU - Razin, Assaf AU - Loungani, Prakash TI - Globalization and Inflation-Output Tradeoffs JF - National Bureau of Economic Research Working Paper Series VL - No. 11641 PY - 2005 Y2 - September 2005 DO - 10.3386/w11641 UR - http://www.nber.org/papers/w11641 L1 - http://www.nber.org/papers/w11641.pdf N1 - Author contact info: Assaf Razin Eitan Berglas School of Economics Tel Aviv University Tel Aviv 69978 ISRAEL Tel: 972/58-7900033 Fax: 972/3-640-9908 E-Mail: razin@tauex.tau.ac.il Prakash Loungani International Monetary Fund 700 19th Street, NW Washington, DC 20431 Tel: 202-623-7043 Fax: 202-623-4943 E-Mail: ploungani@imf.org M1 - published as Assaf Razin, Prakash Loungani. "Globalization and Equilibrium Inflation-Output Tradeoffs," in Jeffrey A. Frankel and Christopher Pissarides, editors, "NBER International Seminar on Macroeconomics 2005" MIT Press (2007) AB - We demonstrate how capital account and trade account liberalizations help reduce inefficiencies associated with the fluctuations in the output gap, relative to the inefficiencies associated with the fluctuations in inflation. With capital account liberalization the representative household is able to smooth fluctuations in consumption, and thus becomes relatively insensitive to fluctuations in the output gap. With trade liberalization the economy tends to specialize in production but not in consumption. The correlation between fluctuations in the output gap and aggregate consumption is therefore weakened by trade openness; hence a smaller weight on the output gap in the utility-based loss function, compared to the closed economy situations.A key implication of the theory is that globalization forces could induce monetary authorities, to put a greater emphasis on reducing the inflation rate than on narrowing the output gaps. We provide a re- interpretation of the evidence on the effect of openness on the sacrifice ratio which supports the prediction of the theory. ER -