Some Simple Tests of the Globalization and Inflation Hypothesis

74 Pages Posted: 22 May 2007

See all articles by Jane E. Ihrig

Jane E. Ihrig

Federal Reserve Board - International Financial Transactions

Steven B. Kamin

Board of Governors of the Federal Reserve System

Deborah Lindner

U.S. Division of Research and Statistics

Jaime Marquez

Board of Governors of the Federal Reserve System - International Financial Transactions Section

Date Written: April 2007

Abstract

This paper evaluates the hypothesis that globalization has increased the role of international factors and decreased the role of domestic factors in the inflation process in industrial economies. Toward that end, we estimate standard Phillips curve inflation equations for 11 industrial countries and use these estimates to test several predictions of the globalization and inflation hypothesis. Our results provide little support for that hypothesis. First, the estimated effect of foreign output gaps on domestic consumer price inflation is generally insignificant and often of the wrong sign. Second, we find no evidence that the trend decline in the sensitivity of inflation to the domestic output gap observed in many countries owes to globalization. Finally, and most surprisingly, our econometric results indicate no increase over time in the responsiveness of inflation to import prices for most countries. However, even though we find no evidence that globalization is affecting the parameters of the inflation process, globalization may be helping to stabilize real GDP and hence inflation. Over time, the volatility of real GDP growth has declined by more than the volatility of domestic demand, suggesting that net exports increasingly are acting to buffer output from fluctuations in domestic demand.

Keywords: inflation, globalization, Phillips curve

JEL Classification: C22, E31, F41

Suggested Citation

Ihrig, Jane E. and Kamin, Steven B. and Lindner, Deborah and Marquez, Jaime, Some Simple Tests of the Globalization and Inflation Hypothesis (April 2007). FRB International Finance Discussion Paper No. 891. Available at SSRN: https://ssrn.com/abstract=987844 or http://dx.doi.org/10.2139/ssrn.987844

Jane E. Ihrig (Contact Author)

Federal Reserve Board - International Financial Transactions ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-3372 (Phone)
202-736-5638 (Fax)

Steven B. Kamin

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-3339 (Phone)
202-736-5638 (Fax)

Deborah Lindner

U.S. Division of Research and Statistics ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202 452 2363 (Phone)

Jaime Marquez

Board of Governors of the Federal Reserve System - International Financial Transactions Section ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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