International Trade and the Connection between Excess Demand and Inflation
This paper demonstrates that globalization, taking the form of a higher import component of consumption and a larger export component of GDP, is the cause of the apparent breakdown in the relationship between excess demand and inflation. Within a parsimonious empirical framework, we show that increasing openness of the US economy is all that is needed to re-establish the relationship between inflation and capacity utilization. We also show that international trade has a significant separate influence on inflation, and is important for identifying a Phillips curve relationship between unemployment and inflation. Copyright Blackwell Publishing Ltd 2005.
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Volume (Year): 13 (2005)
Issue (Month): 4 (09)
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