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Some simple tests of the globalization and inflation hypothesis

  • Jane Ihrig
  • Steven B. Kamin
  • Deborah Lindner
  • Jaime Marquez
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    This paper evaluates the hypothesis that globalization has increased the role of international factors and decreased the role of domestic factors in the inflation process in industrial economies. Toward that end, we estimate standard Phillips curve inflation equations for 11 industrial countries and use these estimates to test several predictions of the globalization and inflation hypothesis. Our results provide little support for that hypothesis. First, the estimated effect of foreign output gaps on domestic consumer price inflation is generally insignificant and often of the wrong sign. Second, we find no evidence that the trend decline in the sensitivity of inflation to the domestic output gap observed in many countries owes to globalization. Finally, and most surprisingly, our econometric results indicate no increase over time in the responsiveness of inflation to import prices for most countries. However, even though we find no evidence that globalization is affecting the parameters of the inflation process, globalization may be helping to stabilize real GDP and hence inflation. Over time, the volatility of real GDP growth has declined by more than the volatility of domestic demand, suggesting that net exports increasingly are acting to buffer output from fluctuations in domestic demand.

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    File URL: http://www.federalreserve.gov/pubs/ifdp/2007/891/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/2007/891/ifdp891.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 891.

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    Date of creation: 2007
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    Handle: RePEc:fip:fedgif:891
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    1. Geoffrey M.B. Tootell, 1998. "Globalization and U.S. inflation," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 21-33.
    2. Javier Andrés & Eva Ortega & Javier Vallés, 2003. "Market structure and inflation differentials in the European Monetary Union," Banco de Espa�a Working Papers 0301, Banco de Espa�a.
    3. Frederic S. Mishkin, 2007. "Inflation Dynamics," NBER Working Papers 13147, National Bureau of Economic Research, Inc.
    4. Orphanides, Athanasios & Wilcox, David W, 2002. "The Opportunistic Approach to Disinflation," International Finance, Wiley Blackwell, vol. 5(1), pages 47-71, Spring.
    5. Ashoka Mody & Franziska Ohnsorge, 2007. "Can Domestic Policies Influence Inflation?," IMF Working Papers 07/257, International Monetary Fund.
    6. John M. Roberts, 2006. "Monetary Policy and Inflation Dynamics," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
    7. Christopher Gust & Jaime Marquez, 2002. "International comparisons of productivity growth: the role of information technology and regulatory practices," International Finance Discussion Papers 727, Board of Governors of the Federal Reserve System (U.S.).
    8. Mark A. Wynne & Erasmus K. Kersting, 2007. "Openness and inflation," Staff Papers, Federal Reserve Bank of Dallas, issue Apr.
    9. Randall S Kroszner, 2007. "The Changing Dynamics of Inflation," Business Economics, Palgrave Macmillan, vol. 42(3), pages 7-13, July.
    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. Matteo Ciccarelli & Benoît Mojon, 2007. "Global Inflation," Kiel Working Papers 1337, Kiel Institute for the World Economy.
    12. Albert S. Dexter & Maurice D. Levi & Barrie R. Nault, 2005. "International Trade and the Connection between Excess Demand and Inflation," Review of International Economics, Wiley Blackwell, vol. 13(4), pages 699-708, 09.
    13. Richard W. Fisher, 2006. "Coping with globalization's impact on monetary policy," Speech 82, Federal Reserve Bank of Dallas.
    14. Janet L. Yellen, 2006. "Monetary policy in a global environment," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun2.
    15. Gabriele Galati & William R. Melick, 2006. "The evolving inflation process: an overview," BIS Working Papers 196, Bank for International Settlements.
    16. Laurence M. Ball, 2006. "Has Globalization Changed Inflation?," NBER Working Papers 12687, National Bureau of Economic Research, Inc.
    17. Charles Bean, 2007. "Globalisation and Inflation," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 8(1), pages 57-73, January.
    18. Peter S. Heller, 2007. "Addressing Climate Change," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 8(1), pages 107-120, January.
    19. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2004. "Competition, Globalization and the Decline of Inflation," CEPR Discussion Papers 4695, C.E.P.R. Discussion Papers.
    20. Tommaso Monacelli, 2003. "Monetary Policy in a Low Pass-Through Environment," Working Papers 228, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    21. Ben S. Bernanke, 2007. "Globalization and monetary policy," Speech 262, Board of Governors of the Federal Reserve System (U.S.).
    22. Nigel Pain & Isabell Koske & Marte Sollie, 2006. "Globalisation and Inflation in the OECD Economies," OECD Economics Department Working Papers 524, OECD Publishing.
    23. Stockton, David J., 1985. "Unbiased estimation of the inflationary effects of relative price disturbances," Economics Letters, Elsevier, vol. 17(4), pages 335-340.
    24. repec:fip:fedgsq:y:2007:i:mar2 is not listed on IDEAS
    25. David J. Stockton, 1985. "Unbiased estimation of the inflationary effects of relative price disturbances," Working Paper Series / Economic Activity Section 48, Board of Governors of the Federal Reserve System (U.S.).
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