Capital mobility and the output–inflation tradeoff

Abstract

Identifying determinants of the output–inflation tradeoff has been a key issue in business cycle research. We provide evidence that in countries with greater restrictions on capital mobility, a given reduction in the inflation rate is associated with a smaller loss in output. This result is shown to be consistent with the predictions of a version of the Mundell–Fleming model. Restrictions on capital mobility are measured using the IMF's Annual Report on Exchange Rate Arrangements and Exchange Restrictions. Estimates of the output–inflation tradeoff are taken from previous studies (viz., Lucas [Am. Econ. Rev. 63 (1973)] and Ball, Mankies and Romer 19 (1988)).