Globalization and Disinflation: The Efficiency Channel

HKIMR Working Paper No. 10/2005

22 Pages Posted: 23 Aug 2007

See all articles by Assaf Razin

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Prakash Loungani

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2005

Abstract

The paper analyzes how globalization forces induce monetary authorities, guided in their policies by the welfare criterion of a representative household, to put a greater emphasis on reducing the inflation rate than on narrowing the output gaps. We demonstrate that with capital account liberalization the representative household is able to smooth fluctuations in consumption, and thus becomes relatively insensitive to fluctuations in the output gap. With trade liberalization the economy tends to specialize in the production of relatively few varieties of goods. The specialization in production as a result of trade openness increases the distortion originating from fluctuations in the inflation rate. Therefore, policymakers (guided by efficiency considerations) become more aggressive on inflation and less responsive to the output gap when trade and financial openness increases. We provide evidence on the effect on preferences towards fluctuations in the output gap and in inflation of trade and capital openness, which supports the theory predictions.

Suggested Citation

Razin, Assaf and Loungani, Prakash, Globalization and Disinflation: The Efficiency Channel (June 2005). HKIMR Working Paper No. 10/2005. Available at SSRN: https://ssrn.com/abstract=1009011 or http://dx.doi.org/10.2139/ssrn.1009011

Assaf Razin (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

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United Kingdom

Prakash Loungani

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7043 (Phone)
202-623-4740 (Fax)

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