Has Globalization Changed the Inflation Process?

63 Pages Posted: 12 Aug 2019

See all articles by Kristin J. Forbes

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: July 4, 2019

Abstract

The relationship central to most inflation models, between slack and inflation, seems to have weakened. Do we need a new framework? This paper uses three very different approaches - principal components, a Phillips curve model, and trend-cycle decomposition - to show that inflation models should more explicitly and comprehensively control for changes in the global economy and allow for key parameters to adjust over time. Global factors, such as global commodity prices, global slack, exchange rates, and producer price competition can all significantly affect inflation, even after controlling for the standard domestic variables. The role of these global factors has changed over the last decade, especially the relationship between global slack, commodity prices, and producer price dispersion with CPI inflation and the cyclical component of inflation. The role of different global and domestic factors varies across countries, but as the world has become more integrated through trade and supply chains, global factors should no longer play an ancillary role in models of inflation dynamics.

Keywords: inflation, Phillips curve, trend-cycle, price dynamics, globalization

JEL Classification: E31, E37, E52, E58, F62

Suggested Citation

Forbes, Kristin J., Has Globalization Changed the Inflation Process? (July 4, 2019). BIS Working Paper No. 791, Available at SSRN: https://ssrn.com/abstract=3420255

Kristin J. Forbes (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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