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Globalisation, domestic inflation and the global output gaps: evidence from the Euro era

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Alessandro Calza
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.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 13.

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Date of creation: 2008
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Handle: RePEc:fip:feddgw:13

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Keywords: Globalization ; Inflation (Finance) ; Monetary policy - Europe ; International trade - Europe;

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  7. M. Hashem Pesaran & Til Schuermann & Scott M. Weiner, 2001. "Modelling regional interdependencies using a global error-correcting macroeconometric model," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B4-1, International Conferences on Panel Data. [Downloadable!]
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  8. Filippo di Mauro & L. Vanessa Smith & Stephane Dees & M. Hashem Pesaran, 2007. "Exploring the international linkages of the euro area: a global VAR analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 1-38. [Downloadable!]
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  13. Baxter, Marianne & Kouparitsas, Michael A., 2005. "Determinants of business cycle comovement: a robust analysis," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 113-157, January. [Downloadable!] (restricted)
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  17. James A. Orr, 1994. "Has excess capacity abroad reduced U.S. inflationary pressures?," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 101-106.
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  21. Altissimo, Filippo & Corradi, Valentina, 2003. "Strong rules for detecting the number of breaks in a time series," Journal of Econometrics, Elsevier, vol. 117(2), pages 207-244, December. [Downloadable!] (restricted)
  22. Regina Kaiser & Agustín Maravall, 1999. "Estimation of the Business Cycle: a Modified Hodrick-Prescott Filter," Banco de España Working Papers 9912, Banco de España.
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