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Global slack and domestic inflation rates: A structural investigation for G-7 countries

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  • Milani, Fabio

Abstract

Recent papers have argued that one implication of globalization is that domestic inflation rates may have now become more a function of "global", rather than domestic, economic conditions, as postulated by closed-economy Phillips curves. This paper aims to assess the empirical importance of global output in determining domestic inflation rates by estimating a structural model for a sample of G-7 economies. The model can capture the potential effects of global output fluctuations on both the aggregate supply and the aggregate demand relations in the economy and it is estimated using full-information Bayesian methods. The empirical results reveal a significant effect of global output on aggregate demand in most countries. Through this channel, global economic conditions can indirectly affect inflation. The results, instead, do not seem to provide evidence in favor of altering domestic Phillips curves to include global slack as an additional driving variable for inflation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 32 (2010)
Issue (Month): 4 (December)
Pages: 968-981

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Handle: RePEc:eee:jmacro:v:32:y:2010:i:4:p:968-981

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Web page: http://www.elsevier.com/locate/inca/622617

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Keywords: Globalization Global slack Inflation dynamics Phillips curve Bayesian estimation;

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Citations

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Cited by:
  1. Milani, Fabio, 2012. "Has Globalization Transformed U.S. Macroeconomic Dynamics?," Macroeconomic Dynamics, Cambridge University Press, vol. 16(02), pages 204-229, April.
  2. Qin, Duo & He, Xinhua, 2011. "Globalisation effect on inflation in the great moderation era: new evidence from G10 countries," MPRA Paper 32994, University Library of Munich, Germany.
  3. Fabio Milani, 2009. "The Effect of Global Output on U.S. Inflation and Inflation Expectations: A Structural Estimation," Working Papers 080920, University of California-Irvine, Department of Economics.
  4. Mardi Dungey & Denise R Osborn, 2009. "Modelling International Linkages for Large Open Economies: US and Euro Area," Centre for Growth and Business Cycle Research Discussion Paper Series 121, Economics, The Univeristy of Manchester.

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