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The Effect of Global Output on U.S. Inflation and Inflation Expectations: A Structural Estimation

  • Fabio Milani

    ()

    (Department of Economics, University of California-Irvine)

Recent research has suggested that globalization may have transformed the U.S. Phillips curve by making inflation a function of global, rather than domestic, economic activity. This paper tests this view by estimating a structural model for the U.S., which incorporates a role of global output on the domestic demand and supply relations and on the formation of expectations. Expectations are modeled as near-rational and economic agents are allowed to learn about the economy's coefficients over time. The estimation reveals small and negative coefficients for the sensitivity of inflation to global output; moreover, the fit of the model improves when global output is excluded from the Phillips curve. Therefore, the evidence does not support altering the traditional closed-economy Phillips curve to include global output. The data suggest, instead, that global output may play an indirect role through the determination of domestic output. But the overall impact of global economic conditions on U.S. inflation remains negligible.

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File URL: http://www.economics.uci.edu/files/docs/workingpapers/2008-09/milani-20.pdf
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Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 080920.

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Length: 28 pages
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:irv:wpaper:080920
Contact details of provider: Postal: Irvine, CA 92697-3125
Phone: (949) 824-5788
Web page: http://www.economics.uci.edu/

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