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Global Slack and Domestic Inflation Rates: A Structural Investigation for G-7 Countries

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  • Fabio Milani

    ()
    (Department of Economics, University of California-Irvine)

Abstract

Recent papers have argued that one implication of globalization is that domestic inflation rates may have now become more a function of ``global", rather than domestic, economic conditions, as postulated by closed-economy Phillips curves. This paper aims to assess the empirical importance of global output in determining domestic inflation rates by estimating a structural model for a sample of G-7 economies. The model can capture the potential effects of global output fluctuations on both the aggregate supply and the aggregate demand relations in the economy and it is estimated using full-information Bayesian methods. The empirical results reveal a significant effect of global output on aggregate demand in most countries. Through this channel, global economic conditions can indirectly affect inflation. The results, instead, do not seem to provide evidence in favor of altering domestic Phillips curves to include global slack as an additional driving variable for inflation.

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Bibliographic Info

Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 080919.

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Length: 25 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:irv:wpaper:080919

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Keywords: Globalization; Global Slack; Inflation Dynamics; Phillips Curve; Bayesian Estimation;

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Citations

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Cited by:
  1. Francesco Bianchi & Andrea Civelli, . "Globalization and Inflation: Evidence from a Time Varying VAR," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  2. Gregor Schwerhoff & Mouhamadou Sy, 2013. "The non-monetary side of the global disinflation," PSE Working Papers, HAL halshs-00564957, HAL.
  3. Qin, Duo & He, Xinhua, 2012. "Globalisation effect on inflation in the great moderation era: New evidence from G10 countries," Economics Discussion Papers, Kiel Institute for the World Economy 2012-56, Kiel Institute for the World Economy.
  4. Milani, Fabio, 2012. "Has Globalization Transformed U.S. Macroeconomic Dynamics?," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 16(02), pages 204-229, April.
  5. Fabio Milani, 2009. "The Effect of Global Output on U.S. Inflation and Inflation Expectations: A Structural Estimation," Working Papers, University of California-Irvine, Department of Economics 080920, University of California-Irvine, Department of Economics.
  6. Dungey, Mardi & Osborne, Denise, 2013. "International Transmissions to Australia: The Roles of the US and Euro Area," Working Papers, University of Tasmania, School of Economics and Finance 17208, University of Tasmania, School of Economics and Finance, revised 16 Oct 2013.

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