Globalization and Disinflation: A Note

Abstract

We analyze how globalization forces induce monetary authorities, guided in their policies by the welfare criterion of a representative household, to put greater emphasis on reducing the inflation rate than on narrowing the output gaps. Specifically, I demonstrate how the relative weight of the output gap term in a utility-based loss function shrinks when the economy is open to international trade in goods, and is integrated to the world capital markets.

Keywords: Aggregate supply, trade openness, captial market openness, inflation-output tradeoff

JEL Classification: E50, F02