Flattened Inflation-Output Tradeoff and Enhanced Anti-Inflation Policy as an Equilibrium Outcome of Globalization

HKIMR Working Paper No. 23/2007

26 Pages Posted: 12 Feb 2008

See all articles by Alon Binyamini

Alon Binyamini

Bank of Israel - Research Department

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)

Date Written: December 1, 2007

Abstract

The paper provides a unified analysis of globalization effects on the inflation-output tradeoff and monetary policy, in the New-Keynesian framework. The main proposition of the paper is threefold. First, labor, goods, and capital mobility tend to flatten the tradeoff between inflation and activity. Second, these globalization forces lead monetary policy to be more aggressive with regard to inflation fluctuations but, at the same time, more benign with respect to the output-gap fluctuations, when policy makers are guided by the welfare criterion of the representative household. Third, the equilibrium response of inflation to supply and demand shocks is more moderate, and the equilibrium response of the output gap to these shocks is more pronounced, when the economy opens up.

Keywords: New-Keynesian Phillips curve, Migration, Trade in goods, Trade in financial assets, Interest rate policy rule

JEL Classification: E50, F30, F22

Suggested Citation

Binyamini, Alon and Razin, Assaf, Flattened Inflation-Output Tradeoff and Enhanced Anti-Inflation Policy as an Equilibrium Outcome of Globalization (December 1, 2007). HKIMR Working Paper No. 23/2007. Available at SSRN: https://ssrn.com/abstract=1091862 or http://dx.doi.org/10.2139/ssrn.1091862

Alon Binyamini

Bank of Israel - Research Department ( email )

PO Box 780
Jerusalem 91007
Israel

Assaf Razin

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

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 7303 (Phone)
+972 3 640 9908 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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