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Globalisation, domestic inflation and global output gaps - evidence from the euro area

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Author Info
Alessandro Calza () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Abstract

This paper tests whether the proposition that globalisation has led to greater sensitivity of domestic inflation to the global output gap (the “global output gap hypothesis”) holds for the euro area. The empirical analysis uses quarterly data over the period 1979-2003. Measures of the global output gap using two different weighting schemes (based on PPPs and trade data) are considered. We find little evidence that global capacity constraints have either explanatory or predictive power for domestic consumer price inflation in the euro area. Based on these findings, the prescription that central banks should specifically react to developments in global output gaps does not seem to be justified for the euro area. JEL Classification: E3, F4.

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Paper provided by European Central Bank in its series Working Paper Series with number 890.

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Length: 36 pages
Date of creation: Apr 2008
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Handle: RePEc:ecb:ecbwps:20080890

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Keywords: Globalisation; inflation; global output gap.;

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sandra Eickmeier & Katharina Moll, 2009. "The global dimension of inflation - evidence from factor-augmented Phillips curves," Working Paper Series 1011, European Central Bank. [Downloadable!]
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