Competition, Globalization and the Decline of Inflation

64 Pages Posted: 28 Dec 2004

See all articles by Natalie Chen

Natalie Chen

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR)

Jean M. Imbs

Paris School of Economics (PSE); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Andrew Scott

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2004

Abstract

We investigate theoretically and empirically the competitive effects of increased trade on prices, productivity and markups. Using disaggregated data for EU manufacturing over the period 1988-2000 we find increased openness exerts a negative and significant impact on sectoral prices. Increased openness lowers prices by both reducing markups and raising productivity. In response to an increase in openness, markups show a steep short run decline, which partly reverses later, while productivity rises in a manner that increases over time. Our estimates suggest that EU manufacturing prices fell by 2.3%, productivity rose by 11% and markups fell by 1.6% in response to the observed increase in manufacturing imports. The direct price restraint caused by greater imports, assuming unchanged monetary policy, can explain a fall in inflation of up to 0.14% per annum. The most substantial impact on inflation arises, however, from the role of lower markups in reducing the inflation bias of monetary policy. Our results suggest that increased trade could account for as much as a quarter of European disinflation over this period.

Keywords: Competition, globalization, inflation, markups, openness, prices, productivity, trade

JEL Classification: E31, F12, F14, F15, L16

Suggested Citation

Chen, Natalie and Imbs, Jean M. and Scott, Andrew, Competition, Globalization and the Decline of Inflation (October 2004). CEPR Discussion Paper No. 4695. Available at SSRN: https://ssrn.com/abstract=639188

Natalie Chen (Contact Author)

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 8419 (Phone)
+44 24 7652 3032 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jean M. Imbs

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Andrew Scott

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7706 6780 (Phone)
+44 20 7402 7875 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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