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Globalisation and inflation: New cross-country evidence on the global determinants of domestic inflation

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  • Claudio E. V. Borio
  • Andrew Filardo

Abstract

There has been mounting evidence that the inflation process has been changing. Inflation is now much lower and much more stable around the globe. And its sensitivity to measures of economic slack and increases in input costs appears to have declined. Probably the most widely supported explanation for this phenomenon is that monetary policy has been much more effective. There is no doubt in our mind that this explanation goes a long way towards explaining the better inflation performance we have observed. In this paper, however, we begin to explore a complementary, rather than alternative, explanation. We argue that prevailing models of inflation are too "country-centric", in the sense that they fail to take sufficient account of the role of global factors in influencing the inflation process. The relevance of a more "globe-centric" approach is likely to have increased as the process of integration of the world economy has gathered momentum, a process commonly referred to as "globalisation". In a large cross-section of countries, we find some rather striking prima facie evidence that this has indeed been the case. In particular, proxies for global economic slack add considerable explanatory power to traditional benchmark inflation rate equations, even allowing for the influence of traditional indicators of external influences on domestic inflation, such as import and oil prices. Moreover, the role of such global factors has been growing over time, especially since the 1990s. And in a number of cases, global factors appear to have supplanted the role of domestic measures of economic slack.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 227.

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Length: 54 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:bis:biswps:227

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Keywords: Globalisation; inflation; monetary policy; Phillips curve;

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References

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  1. Michael B. Devereux & Charles Engel & Peter E. Storgaard, 2003. "Endogenous Exchange Rate Pass-through when Nominal Prices are Set in Advance," IEHAS Discussion Papers 0304, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  2. Aksoy, Yunus & Orphanides, Athanasios & Small, David & Wieland, Volker & Wilcox, David, 2006. "A quantitative exploration of the opportunistic approach to disinflation," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1877-1893, November.
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  7. John DiNardo & Mark P. Moore, 1999. "The Phillips Curve is Back? Using Panel Data to Analyze the Relationship Between Unemployment and Inflation in an Open Economy," NBER Working Papers 7328, National Bureau of Economic Research, Inc.
  8. Troy Matheson, 2006. "Phillips curve forecasting in a small open economy," Reserve Bank of New Zealand Discussion Paper Series DP2006/01, Reserve Bank of New Zealand.
  9. Toshitaka Sekine, 2006. "Time-varying exchange rate pass-through: experiences of some industrial countries," BIS Working Papers 202, Bank for International Settlements.
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  12. Haroon Mumtaz & Paolo Surico, 2012. "Evolving International Inflation Dynamics: World And Country-Specific Factors," Journal of the European Economic Association, European Economic Association, vol. 10(4), pages 716-734, 08.
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  15. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2004. "Competition, Globalization and the Decline of Inflation," CEPR Discussion Papers 4695, C.E.P.R. Discussion Papers.
  16. Luke Willard & Tarhan Feyzioglu, 2006. "Does Inflation in China Affect the United States and Japan?," IMF Working Papers 06/36, International Monetary Fund.
  17. Charles Engel & John H. Rogers & Shing-Yi B. Wang, 2003. "Revisiting the Border: an assessment of the law of one price using very disaggregated consumer price data," International Finance Discussion Papers 777, Board of Governors of the Federal Reserve System (U.S.).
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  1. Unemployment & inflation: the non-trade-off
    by chris dillow in Stumbling and Mumbling on 2010-05-12 12:33:47
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