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Globalization, Inflation and Monetary Policy

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Abstract

Following up on Glatzer, Gnan and Valderrama (2006), we investigate two further channels through which globalization may have dampened inflation in the euro area: first, changed incentives for policymakers; second, global demand and supply conditions. Our empirical evidence shows that the domestic output gap seems to have lost its influence on inflation in the euro area; however, we cannot confirm that euro area inflation is instead significantly influenced by the global output gap. Therefore and because of daunting measurement problems, we caution against attaching undue weight to global output gap developments in central banks’ reaction functions. The flattening of the euro area Phillips curve – together with weakened monetary policy control over inflation due to increasing global long-term interest links and heightened uncertainty for policymakers due to globalization – calls for the stabilization of inflation expectations as a primary goal for monetary policy. Central banks should not rely on the inflation-dampening effects of globalization to last indefinitely: Supply bottlenecks in energy and raw materials, a shift in emerging economies’ savings-investment balance, as well as protectionist pressure may put an end to these effects.

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File URL: http://www.oenb.at/dms/oenb/Publikationen/Volkswirtschaft/Monetary-Policy-and-the-Economy/2006/Monetary-Policy-and-the-Economy-Q4-06/chapters/mop_2006_4_03_tcm16-52024.pdf
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Bibliographic Info

Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Monetary Policy & the Economy.

Volume (Year): (2006)
Issue (Month): 4 ()
Pages: 37–54

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Handle: RePEc:onb:oenbmp:y:2006:i:4:b:3

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Related research

Keywords: Globalization; Inflation; Monetary policy;

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References

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Cited by:
  1. Çiçek, Serkan, 2012. "Globalization and flattening of Phillips Curve in Turkey between 1987 and 2007," Economic Modelling, Elsevier, vol. 29(5), pages 1655-1661.

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