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Globalization and Inflation Dynamics: The Impact of Increased Competition

In: International Dimensions of Monetary Policy

  • Argia M. Sbordone

This paper analyzes the potential effect of global market competition on inflation dynamics. It does so through the lens of the Calvo model of staggered price-setting, which implies that inflation depends on expected future inflation and a measure of marginal costs. I modify the assumption of a constant elasticity of demand, standard in this model, to provide a channel through which an increase in the number of traded goods may affect the degree of strategic complementarity in price setting, and hence alter the dynamic response of inflation to marginal costs. I first discuss the behavior of the variables that drive the impact of trade openness on this response, and then I evaluate whether an increase in the variety of traded goods of the size observed in the US in the `90s might have a sizable quantitative impact. I find that it is difficult to argue that such an increase in trade should have generated an increase in US market competition leading to a decline in the slope of the inflation-marginal cost relation.

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This chapter was published in:
  • Jordi Galí & Mark J. Gertler, 2010. "International Dimensions of Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number gert07-1, December.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 0525.
    Handle: RePEc:nbr:nberch:0525
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    1. Florin Bilbiie & Fabio Ghironi & Marc Melitz, 2012. "Endogenous Entry, Product Variety and Business Cycles," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00680634, HAL.
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    8. Timothy Cogley & Argia M. Sbordone, 2005. "A search for a structural Phillips curve," Staff Reports 203, Federal Reserve Bank of New York.
    9. David Weinstein & Christian Broda, 2004. "Globalization and the Gains from Variety," 2004 Meeting Papers 530, Society for Economic Dynamics.
    10. Kenneth S. Rogoff, 2003. "Globalization and global disinflation," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-112.
    11. Janet L. Yellen, 2006. "Monetary policy in a global environment," Speech 22, Federal Reserve Bank of San Francisco.
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    16. Sbordone, Argia, 1998. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Seminar Papers 653, Stockholm University, Institute for International Economic Studies.
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    20. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2004. "Competition, Globalization and the Decline of Inflation," CEPR Discussion Papers 4695, C.E.P.R. Discussion Papers.
    21. Bakhshi, Hasan & Khan, Hashmat & Burriel-Llombart, Pablo & Rudolf, Barbara, 2007. "The New Keynesian Phillips curve under trend inflation and strategic complementarity," Journal of Macroeconomics, Elsevier, vol. 29(1), pages 37-59, March.
    22. Tack Yun & J. David Lopez-Salido & Andrew Levin, 2007. "Strategic Complementarities and Optimal Monetary Policy," 2007 Meeting Papers 1016, Society for Economic Dynamics.
    23. Kenneth S. Rogoff, 2006. "Impact of globalization on monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 265-305.
    24. Laurence M. Ball, 2006. "Has Globalization Changed Inflation?," NBER Working Papers 12687, National Bureau of Economic Research, Inc.
    25. Marc J. Melitz & Fabio Ghironi & Florin O. Bilbiie, 2007. "Monopoly Power and Endogenous Variety in Dynamic Stochastic General Equilibrium: Distortions and Remedies," 2007 Meeting Papers 772, Society for Economic Dynamics.
    26. Claudio E. V. Borio & Andrew Filardo, 2007. "Globalisation and inflation: New cross-country evidence on the global determinants of domestic inflation," BIS Working Papers 227, Bank for International Settlements.
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