Petrodollars, Globalization And U.S. Inflation

This paper evaluates the theoretical and empirical evidence that bears on the question of whether globalization and petrodollars recycling contributed to significant changes in inflation performance in the U.S. We assume that the impact of globalization can be direct and indirect. Direct impact is through the cheaper imported goods to the U.S. as a component of Consumer Price Index. Indirect impacts are through the effects on wage, cost of capital, and inflow of funds including the petrodollars and the impacts of price of competing goods. Data for analysis are compiled from the Department of Commerce and the International Monetary Fund (IMF) for period of 1990-2005. Our findings suggest that, under current circumstances, globalization could have only a modest disinflationary effect on U.S. inflation. However, if some fundamental factors, such as these countries’ exchange rates, demand and wage change (i.e. increase), then the downward pressure on U.S. inflation will be decreased. The flow of workers from emerging economies to competitive labor markets will slow down. The downward pressure on rich-world wages and prices will lift, and globalization will become an inflationary force instead.