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Some preliminary evidence on the globalization-inflation nexus

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  • Sophie Guilloux
  • Enisse Kharroubi

Abstract

The aim of this paper is to evaluate the impact of globalization, if any, on inflation and the inflation process. We estimate standard Phillips curve equations on a panel of OECD countries over the last 25 years. While recent papers have concluded that globalization has had no significant impact, this paper highlights that trying to capture globalization effects through simple measures of import prices and/or imports to GDP ratios can be misleading. To do so, we try to extend the analysis following two different avenues. We first separate between commodity and non-commodity imports and show that the impact on inflation of commodity import price inflation is qualitatively different from the impact of noncommodity import price inflation, the former depending on the volume of commodity imports while the latter being independent of the volume of non-commodity imports.> ; This first piece of evidence highlights the role of contestability and the insufficiency of trade volume statistics to properly describe the impact of globalization. This leads us to adopt a more systematic approach to capture the contents and not only the volume of trade. Focusing on the role of intra-industry trade, we provide preliminary evidence that this variable can account (i) for the low pass-through of import price to consumer price and (ii) for the flattening of the Phillips curve, i.e. the lower sensitivity of inflation to changes in output gap. We hence conclude that different facets of globalization, especially changes in the nature of goods traded, can be an important channel through which globalization affects the inflation process.

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File URL: http://dallasfed.org/assets/documents/institute/wpapers/2008/0018.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 18.

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Date of creation: 2008
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Handle: RePEc:fip:feddgw:18

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Keywords: Globalization ; Inflation (Finance) ; Time-series analysis ; International trade;

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  1. Gayle Allard, 2005. "Measuring job security over time: in search of a historical indicator for EPL," Working Papers Economia wp05-17, Instituto de Empresa, Area of Economic Environment.
  2. Gayle Allard, 2005. "Measuring The Changing Generosity Of Unemployment Benefits: Beyond Existing Indicators," Working Papers Economia wp05-18, Instituto de Empresa, Area of Economic Environment.
  3. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  4. Daniel Cohen, 2007. "Globalization and Its Enemies," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262532972.
  5. Laurence M. Ball, 2006. "Has Globalization Changed Inflation?," NBER Working Papers 12687, National Bureau of Economic Research, Inc.
  6. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2004. "Competition, Globalization and the Decline of Inflation," CEPR Discussion Papers 4695, C.E.P.R. Discussion Papers.
  7. Hoekman, Bernard & Hiau Looi Kee & Olarreaga, Marcelo, 2001. "Markups, entry regulation, and trade - Does country size matter?," Policy Research Working Paper Series 2662, The World Bank.
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Cited by:
  1. Simone Meier, 2013. "Financial Globalization and Monetary Transmission," Working Papers 2013-03, Swiss National Bank.

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