Capital mobility and the output-inflation tradeoff

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)).