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Globalization and Inflation: Structural Evidence from a Time Varying VAR Approach

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  • Francesco Bianchi
  • Andrea Civelli

Abstract

Under the Globalization Hypothesis for inflation, as globalization increases, global economic slack should progressively replace the domestic gap in driving inflation. In order to assess the empirical support for this theoretical prediction, we use impulse response functions of inflation to domestic and foreign output gap shocks from a TV-VAR model estimated for eighteen countries. The main results of the analysis are twofold: First, the structural results show that global slack affects the dynamics of inflation in many countries, yet these effects do not get stronger over time. Second, a panel analysis that exploits the cross-section characteristics of the response functions shows that globalization, measured in terms of openness and business cycles integration, is positively related to the effects of global slack on inflation. The degree of openness of a country and its economic integration into the global economy are complementary rather than overlaid forces.

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  • Francesco Bianchi & Andrea Civelli, 2013. "Globalization and Inflation: Structural Evidence from a Time Varying VAR Approach," Working Papers 13-20, Duke University, Department of Economics.
    • Handle: RePEc:duk:dukeec:13-20
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    Cited by:

    1. Claudio Borio & Marco Jacopo Lombardi & Fabrizio Zampolli, 2016. "Fiscal sustainability and the financial cycle," BIS Working Papers 552, Bank for International Settlements.
    2. Claudio Borio, 2016. "Revisiting Three Intellectual Pillars of Monetary Policy," Cato Journal, Cato Journal, Cato Institute, vol. 36(2), pages 213-238, Spring/Su.
    3. Zhang, Chengsi & Zhou, You, 2016. "The Global Slack Hypothesis: New Evidence from China," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 339-348.
    4. Chatterjee, Arpita, 2016. "Globalization and monetary policy comovement: International evidence," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 181-202.
    5. Pym Manopimoke, 2015. "Globalization and International Inflation Dynamics: The Role of the Global Output Gap," PIER Discussion Papers 8, Puey Ungphakorn Institute for Economic Research.
    6. Pym Manopimoke, 2015. "Globalization and International Inflation Dynamics: The Role of the Global Output Gap," PIER Discussion Papers 8., Puey Ungphakorn Institute for Economic Research, revised Nov 2015.
    7. Arpita Chatterjee, 2014. "Globalization and Monetary Policy Comovement: Evidence from G-7 Countries," Discussion Papers 2014-19, School of Economics, The University of New South Wales.
    8. Claudio Borio, 2017. "Secular stagnation or financial cycle drag?," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 52(2), pages 87-98, April.

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    More about this item

    Keywords

    Globalization; Inflation; Time-variation; VAR;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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