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The Non-Monetary Side of the Global Disinflation

Author

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  • Gregor Schwerhoff

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  • Mouhamadou Sy

    ()

Abstract

The dramatic decline in inflation across the world over the last 20 years has been largely credited to improved monetary policy. The universal nature of the phenomenon, however, indicates that globalization, which occurred simultaneously, also played a role. We build a model based on Melitz ( 2003 ) in which falling transport cost lead to greater openness, higher productivity and lower inflation. Following a decline in transport cost openness increases and firm selection eliminates the least productive domestic firms. The consequent increase in average productivity leads to falling relative prices for goods. A cash-in-advance constraint allows analyzing how falling relative prices can lead to lower inflation. Using a data set of macroeconomic variables for 123 countries from all world regions, we disentangle the influences of monetary policy and globalization by showing that openness-induced productivity growth leads to a significant decline in inflation world-wide. The results can be further confirmed in a calibration exercise. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Gregor Schwerhoff & Mouhamadou Sy, 2014. "The Non-Monetary Side of the Global Disinflation," Open Economies Review, Springer, vol. 25(2), pages 337-371, April.
  • Handle: RePEc:kap:openec:v:25:y:2014:i:2:p:337-371
    DOI: 10.1007/s11079-013-9283-7
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    File URL: http://hdl.handle.net/10.1007/s11079-013-9283-7
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    Cited by:

    1. Joseph Daniels & Sandeep Mazumder & David VanHoose, 2015. "Implications of Globalization for the Output-inflation Relationship: an Assessment," Open Economies Review, Springer, vol. 26(1), pages 39-60, February.
    2. repec:eee:renene:v:109:y:2017:i:c:p:422-433 is not listed on IDEAS
    3. AndrieĊŸ, Alin Marius & Nistor, Simona, 2016. "Systemic risk, corporate governance and regulation of banks across emerging countries," Economics Letters, Elsevier, vol. 144(C), pages 59-63.

    More about this item

    Keywords

    Globalization; Openness; Monetary policy; Productivity; Disinflation; F15; F41; E31;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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