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Has Globalization Transformed U.S. Macroeconomic Dynamics?

  • Fabio Milani


    (Department of Economics, University of California-Irvine)

This paper estimates a structural New Keynesian model to test whether globalization has changed the behavior of U.S. macroeconomic variables. Several key coefficients in the model - such as the slopes of the Phillips and IS curves, the sensitivities of domestic inflation and output to "global" output, and so forth - are allowed in the estimation to depend on the extent of globalization (modeled as the changing degree of openness to trade of the economy), and, therefore, they become time-varying. The empirical results indicate that globalization can explain only a small part of the reduction in the slope of the Phillips curve. The sensitivity of U.S. inflation to global measures of output may have increased over the sample, but it remains very small. The changes in the IS curve caused by globalization are similarly modest. Globalization does not seem to have led to an attenuation in the effects of monetary policy shocks. The nested closed economy specification still appears to provide a substantially better fit of U.S. data than various open economy specifications with time-varying degrees of openness. Some time variation in the model coefficients over the post-war sample exists, particularly in the volatilities of the shocks, but it is unlikely to be related to globalization.

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Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 091001.

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Length: 27 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:irv:wpaper:091001
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  1. Richard Clarida & Jordi Gali & Mark Gertler, 2002. "A Simple Framework for International Monetary Policy Analysis," NBER Working Papers 8870, National Bureau of Economic Research, Inc.
  2. Kristin J. Forbes & Menzie D. Chinn, 2003. "A Decomposition of Global Linkages in Financial Markets Over Time," NBER Working Papers 9555, National Bureau of Economic Research, Inc.
  3. Jeffrey A. Frankel & Andrew K. Rose, 1996. "The Endogeneity of the Optimum Currency Area Criteria," NBER Working Papers 5700, National Bureau of Economic Research, Inc.
  4. Assaf Razin & Prakash Loungani, 2005. "Globalization and Inflation-Output Tradeoffs," NBER Working Papers 11641, National Bureau of Economic Research, Inc.
  5. repec:tpr:qjecon:v:108:y:1993:i:4:p:869-903 is not listed on IDEAS
  6. Antonello D'Agostino & Paolo Surico, 2009. "Does Global Liquidity Help to Forecast U.S. Inflation?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 479-489, 03.
  7. David Romer, 1991. "Openness and Inflation: Theory and Evidence," NBER Working Papers 3936, National Bureau of Economic Research, Inc.
  8. Argia M. Sbordone, 2007. "Globalization and Inflation Dynamics: The Impact of Increased Competition," NBER Chapters, in: International Dimensions of Monetary Policy, pages 547-579 National Bureau of Economic Research, Inc.
  9. Milani, Fabio, 2011. "The impact of foreign stock markets on macroeconomic dynamics in open economies: A structural estimation," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 111-129, February.
  10. Geoffrey M.B. Tootell, 1998. "Globalization and U.S. inflation," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 21-33.
  11. Assaf Razin & Alon Binyamini, 2007. "Flattened Inflation-Output Tradeoff and Enhanced Anti-Inflation Policy: Outcome of Globalization?," NBER Working Papers 13280, National Bureau of Economic Research, Inc.
  12. Fabio Milani, 2009. "Global slack and domestic inflation rates: a structural investigation for G-7 countries," Globalization and Monetary Policy Institute Working Paper 33, Federal Reserve Bank of Dallas.
  13. Mark A. Wynne & Erasmus K. Kersting, 2007. "Openness and inflation," Staff Papers, Federal Reserve Bank of Dallas, issue Apr.
  14. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2065-2082, October.
  15. Jean Boivin & Marc Giannoni, 2008. "Global Forces and Monetary Policy Effectiveness," NBER Working Papers 13736, National Bureau of Economic Research, Inc.
  16. Robert C. Feenstra & Gordon H. Hanson, 1996. "Globalization, Outsourcing, and Wage Inequality," NBER Working Papers 5424, National Bureau of Economic Research, Inc.
  17. Fabio Milani, 2009. "The Effect of Global Output on U.S. Inflation and Inflation Expectations: A Structural Estimation," Working Papers 080920, University of California-Irvine, Department of Economics.
  18. Laurence M. Ball, 2006. "Has Globalization Changed Inflation?," NBER Working Papers 12687, National Bureau of Economic Research, Inc.
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