Offshoring and Inflation

67 Pages Posted: 3 Nov 2020

See all articles by Diego Comin

Diego Comin

Harvard University - Business School (HBS)

Robert C. Johnson

University of Notre Dame - Department of Economics

Date Written: October 2020

Abstract

Did trade integration suppress inflation in the United States? We say no, in contradiction to the conventional wisdom. Our answer leverages two basic facts about the rise of trade: offshoring accounts for a large share of it, and it was a long-lasting, phased-in shock. Incorporating these features into a New Keynesian model, we show trade integration was inflationary. This result continues to hold when we extend the model to account for US trade deficits, the pro-competitive effects of trade on domestic markups, and cross-sector heterogeneity in trade integration in a multisector model. Further, using the multisector model, we demonstrate that neither cross-sector evidence on trade and prices, nor aggregate time series price level decompositions are informative about the impact of trade on inflation.

Suggested Citation

Comin, Diego and Johnson, Robert C., Offshoring and Inflation (October 2020). CEPR Discussion Paper No. DP15387, Available at SSRN: https://ssrn.com/abstract=3723579

Diego Comin (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Robert C. Johnson

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

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