InflationandGlobalization.pdf

Inflation and Globalization By Blair Cavagrotti Casey Lilenfeld Recent Inflation Developments ? Since the oil price shocks of the 1970’s and the 1980’s, inflation has been on a downward trend. ? Domestic inflation levels have been converging to low levels worldwide. ? Inflation volatility has declined as well. Why is inflation better behaved? ? More credible monetary policy – Central banks learned from the errors of the 1970’s and stabilized their policies. – Central banks have increased their focus on inflation control as a result of institutional reforms like central bank independence and preventative measures. ? Lower inflation environment – Consistent and predictable low inflation has made inflation more stable because the anticipation of low inflation makes firms re-price their goods less often. Another explanation: Globalization! ? What is globalization? – Helbing et al. (2006): The acceleration in the pace of growth of international trade in goods, services, and financial assets relative to the rate of growth in domestic trade. – At the global level, this encompasses the dramatic growth in key emerging markets like China and India. – International trade has increased since the 1970s. – Ball (2006): In addition, financial integration has increased at an unprecedented rate, however, theories of how globalization might affect inflation have to do with trade, not financial integration. ? As economies have opened to trade, competition and flexibility have created favorable conditions for global inflation to decline and output to increase. Trade and Financial Openness In the early 1990s, international trade and financial openness increased for both industrial and emerging market