Competition, Globalization and the Decline of Inflation
We investigate theoretically and empirically the competitive effects of increased trade on prices, productivity and markups. Using disaggregated data for EU manufacturing over the period 1988-2000 we find increased openness exerts a negative and significant impact on sectoral prices. Increased openness lowers prices by both reducing markups and raising productivity. In response to an increase in openness, markups show a steep short run decline, which partly reverses later, while productivity rises in a manner that increases over time. Our estimates suggest that EU manufacturing prices fell by 2.3%, productivity rose by 11% and markups fell by 1.6% in response to the observed increase in manufacturing imports. The direct price restraint caused by greater imports, assuming unchanged monetary policy, can explain a fall in inflation of up to 0.14% per annum. The most substantial impact on inflation arises, however, from the role of lower markups in reducing the inflation bias of monetary policy. Our results suggest that increased trade could account for as much as a quarter of European disinflation over this period.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Oct 2004|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:4695. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.