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Abstract

This paper revisits the hypothesis that globalization may weaken central bank's monetary control by analyzing the potential effect of vertically globalized production structure that increasingly permeates the international production process on domestic macroeconomic dynamics under the foreign disturbances of productivity, demand, and inflation. We do so through the lens of New Keynesian model with Calvo-type staggered price setting and production function that uses foreign intermediate inputs. We find that central bank has to confront a policy tradeoff between stabilizing inflation and real output as exchange rates have transformed aforementioned foreign disturbances into domestic supply shocks channeled thorough real marginal cost.

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File URL: http://www.sciencedirect.com/science/article/B6W5T-4YPGRW8-1/2/7ffa32fe04333d973cfd2b49ba33adad
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Bibliographic Info

Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 21 (2010)
Issue (Month): 2 (August)
Pages: 198-216

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Handle: RePEc:eee:ecofin:v:21:y:2010:i:2:p:198-216

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Web page: http://www.elsevier.com/locate/inca/620163

Related research

Keywords: Vertically globalized production structure Vertical specialization New Keynesian Phillips curve Policy tradeoff;

References

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Cited by:

1. Athukorala, Prema-chandra & Yamashita, Nobuaki, 2006. "Production fragmentation and trade integration: East Asia in a global context," The North American Journal of Economics and Finance, Elsevier, vol. 17(3), pages 233-256, December.
   
   • Prema-chandra Athukorala & Nobuaki Yamashita, 2005. "Production Fragmentation and Trade Integration: East Asia in a Global Context," Departmental Working Papers 2005-07, The Australian National University, Arndt-Corden Department of Economics.

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