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

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Alon Binyamini & Assaf Razin, 2007. "Flattened Inflation-Output Tradeoff and Enhanced Anti-Inflation Policy as an Equilibrium Outcome of Globalization," Working Papers 232007, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:232007
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    References listed on IDEAS

    as
    1. John M. Roberts, 2006. "Monetary Policy and Inflation Dynamics," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
    2. 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.
    3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    4. David Romer, 1998. "A New Assessment of Openness and Inflation: Reply," The Quarterly Journal of Economics, Oxford University Press, vol. 113(2), pages 649-652.
    5. David Romer, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 869-903.
    6. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2004. "Competition, Globalization and the Decline of Inflation," CEPR Discussion Papers 4695, C.E.P.R. Discussion Papers.
    7. 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.
    8. Gita Gopinath & Roberto Rigobon, 2008. "Sticky Borders," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 531-575.
    9. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    10. Loungani, Prakash & Razin, Assaf & Yuen, Chi-Wa, 2001. "Capital mobility and the output-inflation tradeoff," Journal of Development Economics, Elsevier, pages 255-274.
    11. 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.
    12. Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, vol. 42(3-4), pages 327-347, May.
    13. 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.
    14. Charles Bean, 2007. "Globalisation and Inflation," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 8(1), pages 57-73, January.
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    Citations

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    Cited by:

    1. Oguz Atuk & Cem Aysoy & Mustafa Utku Ozmen & Cagri Sarikaya, 2014. "Turkiye’de Enflasyonun Is Cevrimlerine Duyarliligi : Cikti Acigina Duyarli TUFE Alt Gruplarinin Saptanmasi," Working Papers 1437, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    2. Shun-ichiro Bessho & Kimiko Terai, 2011. "Competition for private capital and central grants: the case of Japanese industrial parks," Economics of Governance, Springer, pages 135-154.
    3. Kuttner, Ken & Robinson, Tim, 2010. "Understanding the flattening Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 110-125, August.
    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. Pym Manopimoke, 2015. "Globalization and International Inflation Dynamics: The Role of the Global Output Gap," PIER Discussion Papers 8., Puey Ungphakorn Institute for Economic Research, revised Nov 2015.
    6. Milani, Fabio, 2010. "Global slack and domestic inflation rates: A structural investigation for G-7 countries," Journal of Macroeconomics, Elsevier, pages 968-981.
    7. Kabukcuoglu, Ayse & Martinez-Garcia, Enrique & Soytas, Mehmet A., 2017. "Exploring the Nexus Between Inflation and Globalization Under Inflation Targeting Through the Lens of New Zealand’s Experience," Globalization and Monetary Policy Institute Working Paper 308, Federal Reserve Bank of Dallas.
    8. Milani, Fabio, 2009. "Does global slack matter more than domestic slack in determining U.S. inflation?," Economics Letters, Elsevier, vol. 102(3), pages 147-151, March.
    9. Saglio, Sophie & López-Villavicencio, Antonia, 2012. "Introducing price-setting behaviour in the Phillips Curve: the role of nonlinearities," MPRA Paper 46646, University Library of Munich, Germany.
    10. repec:bpj:bejmac:v:17:y:2017:i:1:p:42:n:3 is not listed on IDEAS
    11. Bashar, Omar H.M.N., 2012. "The dynamics of aggregate demand and supply shocks in ASEAN countries," Journal of Asian Economics, Elsevier, vol. 23(5), pages 507-518.

    More about this item

    Keywords

    New-Keynesian Phillips curve; Migration; Trade in goods; Trade in financial assets; Interestrate policy rule;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F30 - International Economics - - International Finance - - - General
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration

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