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Flattening of the Short-run Trade-off between Inflation and Domestic Activity: The Analytics of the Effects of Globalization

  • Assaf Razin
  • Alon Binyamini

This paper reviews the analytics of the effects of globalization on the Phillips curve and the utility-based objective function of the central bank. It demonstrates that in an endogenous-policy set up, when trade in goods is liberalized, financial openness increases, and in- and out-labor migration are allowed, policymakers become more aggressive on inflation and less responsive to the output gap. In other words, globalization induces the monetary authority, when guided in its policy by the welfare criterion of a representative household, to put more emphasis on the reduction of inflation variability, at the expense of an increase in the output gap variability.

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File URL: https://www.ifw-members.ifw-kiel.de/publications/flattening-of-the-short-run-trade-off-between-inflation-and-domestic-activity-the-analytics-of-the-effects-of-globalization/kap1363.pdf
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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1363.

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Length: 34 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:kie:kieliw:1363
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  1. Timothy Cogley & Thomas J. Sargent, 2005. "Drift and Volatilities: Monetary Policies and Outcomes in the Post WWII U.S," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 262-302, April.
  2. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  3. Assaf Razin & Prakash Loungani & Chi-Wa Yuen, 2000. "Capital Mobility and the Output-Inflation Tradeoff," IMF Working Papers 00/87, International Monetary Fund.
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  9. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
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  11. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
  12. Richard N. Cooper, 1999. "Should Capital Controls be Banished?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 89-142.
  13. Hooker, Mark A, 2002. "Are Oil Shocks Inflationary? Asymmetric and Nonlinear Specifications versus Changes in Regime," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 540-61, May.
  14. Boivin, Jean & Giannoni, Marc, 2006. "Has Monetary Policy Become More Effective?," CEPR Discussion Papers 5463, C.E.P.R. Discussion Papers.
  15. Laurence Ball & Robert Moffitt, 2001. "Productivity Growth and the Phillips Curve," NBER Working Papers 8421, National Bureau of Economic Research, Inc.
  16. Hansen,B.E., 1998. "The grid bootstrap and the autoregressive model," Working papers 26, Wisconsin Madison - Social Systems.
  17. Rebecca Hellerstein & Deirdre Daly & Christina Marsh, 2006. "Have U.S. import prices become less responsive to changes in the dollar?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 12(Sep).
  18. 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.
  19. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2004. "Competition, Globalization and the Decline of Inflation," CEPR Discussion Papers 4695, C.E.P.R. Discussion Papers.
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