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Flattened Inflation-Output Tradeoff and Enhanced Anti-Inflation Policy as an Equilibrium Outcome of Globalization

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Author Info

  • Alon Binyamini

    (Tel Aviv University, Bank of Israel)

  • Assaf Razin

    (Tel Aviv University, Cornell University, National Bureau of Economic Research, Centre for Economic Policy Researchm, Cesifo, Hong Kong Institute for Monetary Research)

Abstract

The paper provides a unified analysis of globalization effects on the inflation-output tradeoff and monetary policy, in the New-Keynesian framework. The main proposition of the paper is threefold. First, labor, goods, and capital mobility tend to flatten the tradeoff between inflation and activity. Second, these globalization forces lead monetary policy to be more aggressive with regard to inflation fluctuations but, at the same time, more benign with respect to the output-gap fluctuations, when policy makers are guided by the welfare criterion of the representative household. Third, the equilibrium response of inflation to supply and demand shocks is more moderate, and the equilibrium response of the output gap to these shocks is more pronounced, when the economy opens up.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 232007.

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Length: 26 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:hkm:wpaper:232007

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Related research

Keywords: New-Keynesian Phillips curve; Migration; Trade in goods; Trade in financial assets; Interestrate policy rule;

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References

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  1. Bentolila, Samuel & Dolado, Juan J. & Jimeno, Juan F., 2007. "Does Immigration Affect the Phillips Curve? Some Evidence for Spain," IZA Discussion Papers 3249, Institute for the Study of Labor (IZA).
  2. David Romer, 1991. "Openness and Inflation: Theory and Evidence," NBER Working Papers 3936, National Bureau of Economic Research, Inc.
  3. Assaf Razin & Prakash Loungani, 2005. "Globalization and Equilibrium Inflation-Output Tradeoffs," NBER Chapters, in: NBER International Seminar on Macroeconomics 2005, pages 171-192 National Bureau of Economic Research, Inc.
  4. Roberts, John M, 2006. "Monetary Policy and Inflation Dynamics," MPRA Paper 812, University Library of Munich, Germany.
  5. Loungani, P. & Eazin, A. & Yuen, C.W., 1996. "Capital Mobility and the Output-Inflation Tradeoff," Papers, Tel Aviv 38-96, Tel Aviv.
  6. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2004. "Competition, Globalization and the Decline of Inflation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4695, C.E.P.R. Discussion Papers.
  7. David Romer, 1998. "A New Assessment Of Openness And Inflation: Reply," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(2), pages 649-652, May.
  8. Robert J. Tetlow & Brian Ironside, 2007. "Real-Time Model Uncertainty in the United States: The Fed, 1996-2003," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(7), pages 1533-1561, October.
  9. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  10. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  11. Charles Bean, 2007. "Globalisation and Inflation," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 8(1), pages 57-73, January.
  12. Gita Gopinath & Roberto Rigobon, 2008. "Sticky Borders," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(2), pages 531-575, 05.
  13. Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, Elsevier, vol. 42(3-4), pages 327-347, May.
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Citations

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Cited by:
  1. Milani, Fabio, 2009. "Does global slack matter more than domestic slack in determining U.S. inflation?," Economics Letters, Elsevier, Elsevier, vol. 102(3), pages 147-151, March.
  2. Bentolila, Samuel & Dolado, Juan J. & Jimeno, Juan Francisco, 2007. "Does Immigration Affect the Phillips Curve? Some Evidence for Spain," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6604, C.E.P.R. Discussion Papers.
  3. Milani, Fabio, 2010. "Global slack and domestic inflation rates: A structural investigation for G-7 countries," Journal of Macroeconomics, Elsevier, Elsevier, vol. 32(4), pages 968-981, December.
  4. Saglio, Sophie & López-Villavicencio, Antonia, 2012. "Introducing price-setting behaviour in the Phillips Curve: the role of nonlinearities," MPRA Paper 46646, University Library of Munich, Germany.
  5. Ken Kuttner & Tim Robinson, 2008. "Understanding the Flattening Phillips Curve," Department of Economics Working Papers, Department of Economics, Williams College 2008-15, Department of Economics, Williams College.
  6. Bashar, Omar H.M.N., 2012. "The dynamics of aggregate demand and supply shocks in ASEAN countries," Journal of Asian Economics, Elsevier, Elsevier, vol. 23(5), pages 507-518.

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