Trade Exposure and the Evolution of Inflation Dynamics

46 Pages Posted: 15 Feb 2019 Last revised: 21 Feb 2019

See all articles by Simon Gilchrist

Simon Gilchrist

New York University (NYU)

Egon Zakrajsek

Federal Reserve Board - Division of Monetary Affairs

Date Written: 2019-02


The diminished sensitivity of inflation to changes in resource utilization that has been observed in many advanced economies over the past several decades is frequently linked to the increase in global economic integration. In this paper, we examine this "globalization" hypothesis using both aggregate U.S. data on measures of inflation and economic slack and a rich panel data set containing producer prices, wages, output, and employment at a narrowly defined industry level. Our results indicate that the rising exposure of the U.S. economy to international trade can indeed help explain a significant fraction of the overall decline in responsiveness of aggregate inflation to fluctuations in economic activity. This flattening of the U.S. Phillips curve is supported strongly by our cross-sectional evidence, which shows that increased trade exposure significantly attenuates the response of inflation to fluctuations in output across industries. Our estimates indicate that the inflation-output tradeoff is about three times larger for low-trade intensity industries compared with their high-trade intensity counterparts.

Keywords: Inflation, Phillips curve, Trade share, Globalization

JEL Classification: E31, E30, E32

Suggested Citation

Gilchrist, Simon and Zakrajsek, Egon, Trade Exposure and the Evolution of Inflation Dynamics (2019-02). FEDS Working Paper No. 2019-007. Available at SSRN: or

Simon Gilchrist (Contact Author)

New York University (NYU) ( email )

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Egon Zakrajsek

Federal Reserve Board - Division of Monetary Affairs ( email )

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