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The Non-Monetary Side of the Global Disinflation

  • Gregor Schwerhoff

    ()

  • Mouhamadou Sy

    ()

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

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File URL: http://hdl.handle.net/10.1007/s11079-013-9283-7
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 25 (2014)
Issue (Month): 2 (April)
Pages: 337-371

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Handle: RePEc:kap:openec:v:25:y:2014:i:2:p:337-371
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  2. Alfaro, Laura, 2005. "Inflation, openness, and exchange-rate regimes: The quest for short-term commitment," Journal of Development Economics, Elsevier, vol. 77(1), pages 229-249, June.
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