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Globalization and U.S. inflation

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  • Geoffrey M.B. Tootell

Abstract

Estimates of the Phillips curve suggest that the low level of unemployment over the last few years should have produced a fairly significant increase in the rate of inflation, yet inflation has continued to fall. Some take this occurrence as evidence that the NAIRU has declined. Others argue that social factors, such as recent movements of employee health coverage to health maintenance organizations have temporarily masked inflation. Perhaps the most widely cited explanation for the surprisingly good inflation performance of late concerns the increasing sensitivity of the U.S. economy to foreign economic conditions; specifically, many have argued that since capacity utilization abroad has been slack in recent years, U.S. inflation has remained mild. This study uses a variety of approaches to examine whether U.S. inflation depends on foreign, rather than domestic capacity constraints. The author shows that foreign capacity plays little, if any, role in the determination of U.S. inflation independent of any role it might play in the determination of U.S. capacity utilization. He cautions that anyone who believes in a world where we no longer need worry about domestic capacity constraints will eventually be rudely awakened by data that suggests otherwise. His results indicate that the Phillips curve, relating some measure of U.S. capacity to U.S. inflation, is alive, if ailing a bit, even as the world gets more integrated.

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Bibliographic Info

Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (1998)
Issue (Month): Jul ()
Pages: 21-33

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Handle: RePEc:fip:fedbne:y:1998:i:jul:p:21-33

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Keywords: Inflation (Finance);

References

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  1. Kenneth A. Froot & Paul Klemperer, 1989. "Exchange Rate Pass-Through When Market Share Matters," NBER Working Papers 2542, National Bureau of Economic Research, Inc.
  2. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis And The European Unemployment Problem," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90 National Bureau of Economic Research, Inc.
  3. Joseph E. Gagnon & Michael M. Knetter, 1992. "Markup Adjustment and Exchange Rate Fluctuations: Evidence From Panel Data on Automobile Exports," NBER Working Papers 4123, National Bureau of Economic Research, Inc.
  4. Jeffrey C. Fuhrer, 1995. "The Phillips curve is alive and well," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-56.
  5. Richard Baldwin, 1988. "Hysteresis In Import Prices: The Beachhead Effect," NBER Working Papers 2545, National Bureau of Economic Research, Inc.
  6. Brian Motley, 1990. "Has there been a change in the natural rate of unemployment?," Economic Review, Federal Reserve Bank of San Francisco, issue Win, pages 3-16.
  7. Robert C. Feenstra & Joseph E. Gagnon & Michael M. Knetter, 1993. "Market Share and Exchange Rate Pass-Through in World Automobile Trade," NBER Working Papers 4399, National Bureau of Economic Research, Inc.
  8. Stuart E. Weiner, 1993. "New estimates of the natural rate of unemployment," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 53-69.
  9. Dixit, Avinash K, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 205-28, May.
  10. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
  11. Jeffrey Sachs, 1986. "High Unemployment in Europe: Diagnosis and Policy Implications," NBER Working Papers 1830, National Bureau of Economic Research, Inc.
  12. Geoffrey M.B. Tootell, 1994. "Restructuring, the NAIRU, and the Phillips curve," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 31-44.
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