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Flattened Inflation-Output Tradeoff and Enhanced Anti-Inflation Policy as an Equilibrium Outcome of Globalization

  • Alon Binyamini

    (Tel Aviv University, Bank of Israel)

  • Assaf Razin

    (Tel Aviv University, Cornell University, National Bureau of Economic Research, Centre for Economic Policy Researchm, Cesifo, Hong Kong Institute for Monetary Research)

The paper provides a unified analysis of globalization effects on the inflation-output tradeoff and monetary policy, in the New-Keynesian framework. The main proposition of the paper is threefold. First, labor, goods, and capital mobility tend to flatten the tradeoff between inflation and activity. Second, these globalization forces lead monetary policy to be more aggressive with regard to inflation fluctuations but, at the same time, more benign with respect to the output-gap fluctuations, when policy makers are guided by the welfare criterion of the representative household. Third, the equilibrium response of inflation to supply and demand shocks is more moderate, and the equilibrium response of the output gap to these shocks is more pronounced, when the economy opens up.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 232007.

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Length: 26 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:hkm:wpaper:232007
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  1. Roberts, John M, 2006. "Monetary Policy and Inflation Dynamics," MPRA Paper 812, University Library of Munich, Germany.
  2. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
  3. Loungani, Prakash & Razin, Assaf & Yuen, Chi-Wa, 1997. "Capital Mobility and the Output-Inflation Tradeoff," CEPR Discussion Papers 1577, C.E.P.R. Discussion Papers.
  4. Bentolila, Samuel & Dolado, Juan J. & Jimeno, Juan F., 2008. "Does immigration affect the Phillips curve? Some evidence for Spain," European Economic Review, Elsevier, vol. 52(8), pages 1398-1423, November.
  5. David Romer, 1991. "Openness and Inflation: Theory and Evidence," NBER Working Papers 3936, National Bureau of Economic Research, Inc.
  6. Robert J. Tetlow & Brian Ironside, 2007. "Real-Time Model Uncertainty in the United States: The Fed, 1996-2003," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1533-1561, October.
  7. 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.
  8. Assaf Razin & Prakash Loungani, 2005. "Globalization and Equilibrium Inflation-Output Tradeoffs," NBER Chapters, in: NBER International Seminar on Macroeconomics 2005, pages 171-192 National Bureau of Economic Research, Inc.
  9. Gita Gopinath & Roberto Rigobon, 2008. "Sticky Borders," The Quarterly Journal of Economics, MIT Press, vol. 123(2), pages 531-575, 05.
  10. David Romer, 1998. "A New Assessment Of Openness And Inflation: Reply," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 649-652, May.
  11. Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, vol. 42(3-4), pages 327-347, May.
  12. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2004. "Competition, Globalization and the Decline of Inflation," CEPR Discussion Papers 4695, C.E.P.R. Discussion Papers.
  13. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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