Razin and Loungani analyze how globalization induces monetary authorities, guided by the welfare criterion of a representative household, to put greater emphasis on reducing the inflation rate than on narrowing output gaps.

• Position: Conferences

Razin and Loungani analyze how globalization induces monetary authorities, guided by the welfare criterion of a representative household, to put greater emphasis on reducing the inflation rate than on narrowing output gaps. The authors demonstrate that, 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 the production of relatively few varieties of goods. The specialization in production resulting from trade openness...