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Globalization, Inflation and Monetary Policy

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Abstract

Following up on Glatzer, Gnan and Valderrama (2006), we investigate two further channels through which globalization may have dampened inflation in the euro area: first, changed incentives for policymakers; second, global demand and supply conditions. Our empirical evidence shows that the domestic output gap seems to have lost its influence on inflation in the euro area; however, we cannot confirm that euro area inflation is instead significantly influenced by the global output gap. Therefore and because of daunting measurement problems, we caution against attaching undue weight to global output gap developments in central banks’ reaction functions. The flattening of the euro area Phillips curve – together with weakened monetary policy control over inflation due to increasing global long-term interest links and heightened uncertainty for policymakers due to globalization – calls for the stabilization of inflation expectations as a primary goal for monetary policy. Central banks should not rely on the inflation-dampening effects of globalization to last indefinitely: Supply bottlenecks in energy and raw materials, a shift in emerging economies’ savings-investment balance, as well as protectionist pressure may put an end to these effects.

Suggested Citation

  • Ernest Gnan & Maria Teresa Valderrama, 2006. "Globalization, Inflation and Monetary Policy," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 37-54.
  • Handle: RePEc:onb:oenbmp:y:2006:i:4:b:3
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    Cited by:

    1. Çiçek, Serkan, 2012. "Globalization and flattening of Phillips Curve in Turkey between 1987 and 2007," Economic Modelling, Elsevier, vol. 29(5), pages 1655-1661.
    2. Jesús Cuaresma & Ernest Gnan, 2007. "The natural rate of interest: which concept? which estimation method? which policy conclusions?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 29(4), pages 667-688.

    More about this item

    Keywords

    Globalization; Inflation; Monetary policy;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F15 - International Economics - - Trade - - - Economic Integration

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