Monetary policy games, inflationary bias, and openness

Abstract

When a country's central bank has higher output objectives than those of wage-setters, the noncooperative Nash equilibrium contains an inflationary bias, which is higher, the flatter the economy's aggregate supply curve. An economy's openness from the input side is an exogenous observable characteristic that provides a direct way of testing the theory. When the imported intermediate goods displace capital (labor) in production, a higher degree of openness flattens (steepens) the economy's aggregate supply curve and increases (decreases) the inflationary bias.