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Globalization, market structure and inflation dynamics

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  • Guilloux-Nefussi, Sophie

Abstract

The decline in the sensitivity of inflation to domestic slack observed in developed countries since the mid-1980s has been often attributed to globalization. However, this intuition has so far not been formalized. I develop a general equilibrium setup in which the sensitivity of inflation to marginal cost decreases in response to a fall in trade costs. In order to do so, I add three ingredients to an otherwise standard two-country new-Keynesian model: strategic interactions, endogenous entry of exporters and heterogeneous productivity. Because of differences in firms productivity, only high-productivity firms (that are also the larger ones) start exporting when international trade cost falls. These firms transmit less marginal cost fluctuations to their prices, rather strategically absorbing them into their desired markup. At the aggregate level, the increase in the proportion of large firms makes inflation respond less to real activity fluctuations. A simple calibration of the model shows that globalization could explain around one fifth to one third of the flattening of the Phillips curve in the United States from the early 1980s to mid-2000s.

Suggested Citation

  • Guilloux-Nefussi, Sophie, 2020. "Globalization, market structure and inflation dynamics," Journal of International Economics, Elsevier, vol. 123(C).
  • Handle: RePEc:eee:inecon:v:123:y:2020:i:c:s0022199620300118
    DOI: 10.1016/j.jinteco.2020.103292
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    2. Mr. Sebastian Weber & Mirko Abbritti, 2019. "Market Regulation, Cycles and Growth in a Monetary Union," IMF Working Papers 2019/123, International Monetary Fund.
    3. Lodge, David & Pérez, Javier J. & Albrizio, Silvia & Everett, Mary & De Bandt, Olivier & Georgiadis, Georgios & Ca' Zorzi, Michele & Lastauskas, Povilas & Carluccio, Juan & Parrága, Susana & Carvalho,, 2021. "The implications of globalisation for the ECB monetary policy strategy," Occasional Paper Series 263, European Central Bank.
    4. Sophie Guilloux-Nefussi, 2017. "Globalisation and industry concentration: What are the consequences for inflation dynamics?," Rue de la Banque, Banque de France, issue 45, june..
    5. Szafranek, Karol, 2017. "Flattening of the New Keynesian Phillips curve: Evidence for an emerging, small open economy," Economic Modelling, Elsevier, vol. 63(C), pages 334-348.
    6. Kitenge, Erick, 2021. "The Linder hypothesis during the globalization era," Economics Letters, Elsevier, vol. 200(C).

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    More about this item

    Keywords

    Inflation; Impact of globalization; Strategic interactions; Market structure; Phillips curve;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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