Inflation, openness and exchange rate regimes + the quest for short-term commitment

This paper further tests Kydland and Prescott's (1977) predictions on dynamic-inconsistency problems. The two big advantages of fixingthe exchange rate are the reduction of transaction costs and exchange rate risk, which can discourage trade and investment plus the provision of a credible nominal anchor for monetary policy. Therefore, generalizing Romer's(1993) arguments, if the openness-inflation relation arises from the dynamic inconsistency of discretionary monetary policy, the relationship should be weaker in countries that have fixed exchange-rate regime dummy has a significant and negative correlation with openness after controlling for income per capita and after including both year and country dummies..