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Globalisation, import prices and inflation dynamics

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  • Peacock, Chris

    ()

    (Bank of England)

  • Baumann, Ursel

    ()

    (European Central Bank)

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    Abstract

    In this paper we model the role of open-economy effects within a New Keynesian Phillips Curve (NKPC) via the inclusion of intermediate imports in firms' production technology. Using this framework we provide evidence on two questions: first, does the inclusion of import prices help explain post-war inflation dynamics in the United Kingdom , United States and Japan; and second, has the influence of import prices in firms' costs become greater over the more recent period since the mid-1980s. Overall, our results suggest that import prices do help explain movements in inflation; in particular, NKPC models that allow for import prices to enter into firms' costs outperform closed-economy models in sample. However, our results suggest that the influence of import prices has generally remained constant across our sample period, with perhaps only the United Kingdom providing some evidence that import prices have become more important in firms' marginal costs.

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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2008/wp359.pdf
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    Paper provided by Bank of England in its series Bank of England working papers with number 359.

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    Length: 23 pages
    Date of creation: 22 Dec 2008
    Date of revision:
    Handle: RePEc:boe:boeewp:0359
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    Keywords: Globalisation; inflation dynamics; import prices; New Keynesian Phillips Curves;

    This paper has been announced in the following NEP Reports:

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    1. Argia M. Sbordone, 2007. "Globalization and Inflation Dynamics: the Impact of Increased Competition," NBER Working Papers 13556, National Bureau of Economic Research, Inc.
    2. Hashmat Khan, 2004. "Price-setting behaviour, competition, and mark-up shocks in the New Keynesian model," Bank of England working papers 240, Bank of England.
    3. Campbell Leith & Jim Malley, 2002. "Estimated Open Economy New Keynesian Phillips Curves for the G7," Working Papers 2002_8, Business School - Economics, University of Glasgow.
    4. Assaf Razin & Alon Binyamini, 2007. "Flattened Inflation-Output Tradeoff and Enhanced Anti-Inflation Policy: Outcome of Globalization?," NBER Working Papers 13280, National Bureau of Economic Research, Inc.
    5. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    6. Julio J. Rotemberg, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 517-531.
    7. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2009. "The dynamics of trade and competition," Journal of International Economics, Elsevier, vol. 77(1), pages 50-62, February.
    8. Nigel Pain & Isabell Koske & Marte Sollie, 2006. "Globalisation and Inflation in the OECD Economies," OECD Economics Department Working Papers 524, OECD Publishing.
    9. Gamber, Edward N & Hung, Juann H, 2001. "Has the Rise in Globalization Reduced U.S. Inflation in the 1990s?," Economic Inquiry, Western Economic Association International, vol. 39(1), pages 58-73, January.
    10. Ravi Balakrishnan & J David Lopez-Salido, 2002. "Understanding UK inflation: the role of openness," Bank of England working papers 164, Bank of England.
    11. Laurence M. Ball, 2006. "Has Globalization Changed Inflation?," NBER Working Papers 12687, National Bureau of Economic Research, Inc.
    12. Kurmann, Andre, 2007. "VAR-based estimation of Euler equations with an application to New Keynesian pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 767-796, March.
    13. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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