Globalization, the output-inflation tradeoff and inflation
AbstractThis paper provides comprehensive evidence on the relation between inflation and globalization, defined here as trade and financial openness, using a large cross-section of 91 countries over the period 1985-2004. We establish two main empirical regularities: both higher trade and financial openness (i) reduce central banks' inflation bias, yielding lower average inflation and (ii) are associated with a larger output-inflation tradeoff. This evidence is at odds with the standard Barro-Gordon framework, which would require globalization to have a negative effect on the output-inflation tradeoff to yield lower equilibrium inflation, but it is consistent with a recent strand of new Keynesian models emphasizing the role of imperfect competition and nominal rigidities. Our findings also support the relevance of the time-inconsistency hypothesis, which underlies the theoretical models predicting a relation between globalization and inflation. For the OECD subsample, however, we do not find an effect of openness on inflation (the output-inflation tradeoff), suggesting that these countries have created an institutional framework for central banks that eliminates distortions due to the time-inconsistency problem.
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Bibliographic InfoArticle provided by Elsevier in its journal European Economic Review.
Volume (Year): 53 (2009)
Issue (Month): 8 (November)
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Web page: http://www.elsevier.com/locate/eer
Globalization Trade Financial Openness Inflation;
Other versions of this item:
- Harald Badinger, 2008. "Globalization,the Output-Inflation Tradeoff, and Inflation," FIW Working Paper series 010, FIW.
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F10 - International Economics - - Trade - - - General
- F30 - International Economics - - International Finance - - - General
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