The Globalisation of Inflation: The Growing Importance of Global Value Chains

29 Pages Posted: 10 Jan 2017

See all articles by Raphael Auer

Raphael Auer

Swiss National Bank; Bank for International Settlements (BIS)

Claudio E. V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis

Andrew J. Filardo

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: January 2017

Abstract

Greater international economic interconnectedness over recent decades has been changing inflation dynamics. This paper presents evidence that the expansion of global value chains (GVCs), ie cross-border trade in intermediate goods and services, is an important channel through which global economic slack influences domestic inflation. In particular, we document the extent to which the growth in GVCs explains the established empirical correlation between global economic slack and national inflation rates, both across countries and over time. Accounting for the role of GVCs, we also find that the conventional trade-based measures of openness used in previous studies are poor proxies for this transmission channel. The results support the hypothesis that as GVCs expand, direct and indirect competition among economies increases, making domestic inflation more sensitive to the global output gap. This can affect the trade-offs that central banks face when managing inflation.

Keywords: globalisation, inflation, Phillips curve, monetary policy, global value chain, production structure, international inflation synchronisation, input-ouput linkages, supply chain

JEL Classification: E31, E52, E58, F02, F41, F42, F14, F62

Suggested Citation

Auer, Raphael and Borio, Claudio E.V. and Filardo, Andrew J., The Globalisation of Inflation: The Growing Importance of Global Value Chains (January 2017). BIS Working Paper No. 602. Available at SSRN: https://ssrn.com/abstract=2896743

Raphael Auer (Contact Author)

Swiss National Bank ( email )

Fraumuensterstr. 8
Zurich, 8022
Switzerland

Bank for International Settlements (BIS)

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Claudio E.V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Andrew J. Filardo

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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