On Trade and Inflation (Forecast) Sagas (fg)

It may be right - trade liberalization may put relative downward pressure on import prices and on those domestic prices competing with foreign products. However, from a theoretical point of view there can be no direct link from the degree of trade openess to the absolute level of prices as it is stated in a recent voxeu article. The authors claim that with increasing trade levels, inflation-forecasting procedures may become much more difficult for central banks. I cannot aggree on this issue.

• Even in a trade-liberalized world, it's the central bank which finally controls inflation (see Ball)
• There may arise some difficulties to get inflation under control in an endogenous monetary system (you know, this never ending bla bla story); however, central banks can adjust their interest rates in order to avoid excessive credit growth; if absolute prices nonetheless continue to rise, money demand or real output must change!
• To forecast inflation, Michael Woodford showed that you just need a variable with the same stochastic trend to that of inflation, i.e. inflation itself and in addition stationary variable which represents departures from that trend, i.e. the output gap. Olè!