Globalization and Inflation

The issue of whether globalization has yielded structural changes in the process of inflation is crucial for the definition of the role of monetary policy, and for an assessment of the strategies followed by central banks around the world. This briefing paper will first frame the argument by showing a series of stylized facts on inflation. In the last 15 years or so, disinflation and the increase of world trade seem to have gone hand in hand. This phenomenon does not seem to have been fuelled by lower mark up but by a decrease in the wage/productivity ratio. The briefing paper then tries to identify the channels through which increased openness to trade affects inflation: cheap imports, increased competition in the labour market, the disappearance of bottlenecks, the selection process of firms etc. The effect of globalization on (dis)inflation seems to be robust, but the question of its duration remains: is it transitory or permanent? If the transition period is rather long, which is likely, then monetary policy could more than ever participate to the others general goals of economic policy, at least in industrialized countries.