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Globalization and inflation dynamics: the impact of increased competition

  • Argia M. Sbordone

This paper analyzes the potential effect of global market competition on inflation dynamics. It does so through the lens of the Calvo model of staggered price setting, which implies that inflation depends on expected future inflation and a measure of marginal costs. I modify the assumption of a constant elasticity of demand, standard in this model, to provide a channel through which an increase in the number of traded goods may affect the degree of strategic complementarity in price setting and hence alter the dynamic response of inflation to marginal costs. I first discuss the behavior of the variables that drive the impact of trade openness on this response, and then I evaluate whether an increase in the variety of traded goods of the magnitude observed in the United States in the 1990s might have a significant quantitative impact. I find that it is difficult to argue that such an increase in trade would have generated a sufficiently large increase in U.S. market competition to reduce the slope of the inflation-marginal cost relation.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 324.

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Date of creation: 2008
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Handle: RePEc:fip:fednsr:324
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  1. Tack Yun & J. David Lopez-Salido & Andrew Levin, 2007. "Strategic Complementarities and Optimal Monetary Policy," 2007 Meeting Papers 1016, Society for Economic Dynamics.
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  9. Ottaviano, Gianmarco & Melitz, Marc, 2008. "Market Size, Trade, and Productivity," Scholarly Articles 3229096, Harvard University Department of Economics.
  10. Tim W. Cogley & Argia M. Sbordone, 2005. "A Search for a Structural Phillips Curve," Working Papers 510, University of California, Davis, Department of Economics.
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  14. Marc Melitz & Ghironi, Fabio & Florin Bilbiie, 2006. "Monopoly Power and Endogenous Variety in Dynamic Stochastic General Equilibrium: Distortions and Remedies," Working Paper 14401, Harvard University OpenScholar.
  15. Miles S. Kimball & Michael Woodford, 1994. "The quantitative analysis of the basic neomonetarist model," Proceedings, Federal Reserve Bank of Cleveland, pages 1241-1289.
  16. Michael Dotsey & Robert G. King, 2005. "Implications of state-dependent pricing for dynamic macroeconomic models," Working Papers 05-2, Federal Reserve Bank of Philadelphia.
  17. Eichenbaum, Martin & Fisher, Jonas D.M., 2007. "Estimating the frequency of price re-optimization in Calvo-style models," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2032-2047, October.
  18. Bakhshi, Hasan & Khan, Hashmat & Burriel-Llombart, Pablo & Rudolf, Barbara, 2007. "The New Keynesian Phillips curve under trend inflation and strategic complementarity," Journal of Macroeconomics, Elsevier, vol. 29(1), pages 37-59, March.
  19. Benassy, Jean-Pascal, 1996. "Taste for variety and optimum production patterns in monopolistic competition," Economics Letters, Elsevier, vol. 52(1), pages 41-47, July.
  20. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2004. "Competition, Globalization and the Decline of Inflation," CEPR Discussion Papers 4695, C.E.P.R. Discussion Papers.
  21. Laurence M. Ball, 2006. "Has Globalization Changed Inflation?," NBER Working Papers 12687, National Bureau of Economic Research, Inc.
  22. Claudio E. V. Borio & Andrew Filardo, 2007. "Globalisation and inflation: New cross-country evidence on the global determinants of domestic inflation," BIS Working Papers 227, Bank for International Settlements.
  23. Kenneth S. Rogoff, 2006. "Impact of globalization on monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 265-305.
  24. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing And The General Equilibrium Dynamics Of Money And Output," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 655-690, May.
  25. Assaf Razin & Chi-Wa Yuen, 2001. "The "New Keynesian" Phillips Curve: Closed Economy vs. Open Economy," NBER Working Papers 8313, National Bureau of Economic Research, Inc.
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