Globalization, Inflation Dynamics and the Slope of the Phillips Curve

We study how international trade has affected U.S. inflation dynamics. We develop a multi-region New Keynesian model of an open monetary union in which regional Phillips curve slopes depend on exposure to imported goods. Guided by the model, we construct state-level measures of import penetration in final consumption and exploit cross-state variation to estimate regional Phillips curves over 1976-2017. Greater import exposure leads to significantly flatter state-level Phillips curves. We estimate that rising import exposure accounts for roughly 40 percent of the flattening of the U.S. Phillips curve over this period. Increased import exposure also shifted the U.S. Phillips curve downward, reducing inflation by about 0.17 percentage point annually between 1976 and 2008. A reversal of globalization to early-1990s levels would substantially alter monetary policy trade-offs, reducing the sacrifice ratio by almost one-half. Our findings show that international trade has played a quantitatively important role in shaping U.S. inflation dynamics.