Working Paper

Some preliminary evidence on the globalization-inflation nexus

Abstract: The aim of this paper is to evaluate the impact of globalization, if any, on inflation and the inflation process. We estimate standard Phillips curve equations on a panel of OECD countries over the last 25 years. While recent papers have concluded that globalization has had no significant impact, this paper highlights that trying to capture globalization effects through simple measures of import prices and/or imports to GDP ratios can be misleading. To do so, we try to extend the analysis following two different avenues. We first separate between commodity and non-commodity imports and show that the impact on inflation of commodity import price inflation is qualitatively different from the impact of noncommodity import price inflation, the former depending on the volume of commodity imports while the latter being independent of the volume of non-commodity imports.> ; This first piece of evidence highlights the role of contestability and the insufficiency of trade volume statistics to properly describe the impact of globalization. This leads us to adopt a more systematic approach to capture the contents and not only the volume of trade. Focusing on the role of intra-industry trade, we provide preliminary evidence that this variable can account (i) for the low pass-through of import price to consumer price and (ii) for the flattening of the Phillips curve, i.e. the lower sensitivity of inflation to changes in output gap. We hence conclude that different facets of globalization, especially changes in the nature of goods traded, can be an important channel through which globalization affects the inflation process.

Keywords: Globalization; Inflation (Finance); time series analysis; International trade;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2008

Number: 18

Pages: 45 pages