International Trade and the Connection Between Excess Demand and Inflation

Abstract:     
This paper demonstrates that globalization, taking the form of a higher import component of consumption and a larger export component of GDP, is the cause of the apparent breakdown in the relationship between excess demand and inflation. Within a parsimonious empirical framework, we show that increasing openness of the U.S. economy is all that is needed to reestablish the relationship between inflation and capacity utilization. We also show that international trade has a significant separate influence on inflation, and is important for identifying a Phillips curve relationship between unemployment and inflation.

Number of Pages in PDF File: 14

Accepted Paper Series