Inflation and Globalization - University of California ...webfac/eichengreen/e183... · Inflation...
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Inflation and Globalization By Blair Cavagrotti & Casey Lilenfeld
Transcript of Inflation and Globalization - University of California ...webfac/eichengreen/e183... · Inflation...
Infla
tion
and
Glo
baliz
atio
n
By
Bla
ir C
avag
rotti
& C
asey
Lile
nfel
d
Rec
ent I
nfla
tion
Dev
elop
men
ts•
Sin
ce th
e oi
l pric
e sh
ocks
of t
he 1
970’
s an
d th
e 19
80’s
, in
flatio
n ha
s be
en o
n a
dow
nwar
d tre
nd.
•D
omes
tic in
flatio
n le
vels
hav
e be
en
conv
ergi
ng to
low
le
vels
wor
ldw
ide.
•In
flatio
n vo
latil
ity h
as
decl
ined
as
wel
l.
Why
is in
flatio
n be
tter b
ehav
ed?
•M
ore
cred
ible
mon
etar
y po
licy
–C
entra
l ban
ks le
arne
d fro
m th
e er
rors
of t
he 1
970’
s an
d st
abili
zed
thei
r pol
icie
s.–
Cen
tral b
anks
hav
e in
crea
sed
thei
r foc
us o
n in
flatio
n co
ntro
l as
a re
sult
of in
stitu
tiona
l ref
orm
s lik
e ce
ntra
l ba
nk in
depe
nden
ce a
nd p
reve
ntat
ive
mea
sure
s.•
Low
er in
flatio
n en
viro
nmen
t–
Con
sist
ent a
nd p
redi
ctab
le lo
w in
flatio
n ha
s m
ade
infla
tion
mor
e st
able
bec
ause
the
antic
ipat
ion
of lo
w
infla
tion
mak
es fi
rms
re-p
rice
thei
r goo
ds le
ss o
ften.
Ano
ther
exp
lana
tion:
Glo
baliz
atio
n!•
Wha
t is
glob
aliz
atio
n?–
Hel
bing
et a
l. (2
006)
: Th
e ac
cele
ratio
n in
the
pace
of g
row
th o
f in
tern
atio
nal t
rade
in g
oods
, ser
vice
s, a
nd fi
nanc
ial a
sset
s re
lativ
e to
the
rate
of g
row
th in
dom
estic
trad
e.–
At t
he g
loba
l lev
el, t
his
enco
mpa
sses
the
dram
atic
gro
wth
in k
eyem
ergi
ng m
arke
ts li
ke C
hina
and
Indi
a.–
Inte
rnat
iona
l tra
de h
as in
crea
sed
sinc
e th
e 19
70s.
–B
all (
2006
): In
add
ition
, fin
anci
al in
tegr
atio
n ha
s in
crea
sed
at a
n un
prec
eden
ted
rate
, how
ever
, the
orie
s of
how
glo
baliz
atio
n m
ight
affe
ct in
flatio
n ha
ve to
do
with
trad
e, n
ot fi
nanc
ial
inte
grat
ion.
•A
s ec
onom
ies
have
ope
ned
to tr
ade,
com
petit
ion
and
flexi
bilit
y ha
ve c
reat
ed fa
vora
ble
cond
ition
s fo
r glo
bal
infla
tion
to d
eclin
e an
d ou
tput
to in
crea
se.
Trad
e an
d Fi
nanc
ial O
penn
ess
In th
e ea
rly 1
990s
, in
tern
atio
nal t
rade
and
fin
anci
al o
penn
ess
incr
ease
d fo
r bot
h in
dust
rial a
nd
emer
ging
mar
ket
econ
omie
s, re
flect
ing
an a
ccel
erat
ion
in
glob
aliz
atio
n.
•Th
roug
h po
licy
–C
entra
l ban
ks’i
nfla
tion
targ
ets
are
low
er b
ecau
se g
loba
lizat
ion
mea
ns th
ey c
an’t
use
infla
tion
to s
timul
ate
shor
t-ter
m d
omes
tic
dem
and.
•Th
roug
h tra
de–
Pric
es o
f goo
ds h
ave
falle
n du
e to
inte
rnat
iona
l com
petit
ion
and
incr
ease
d su
bstit
utab
ility
.–
Mar
kups
by
dom
estic
pro
duce
rs a
re m
oder
ated
by
com
petit
ion
from
ab
road
.•
Thro
ugh
grow
th–
Glo
baliz
atio
n le
ads
to c
ompe
titiv
e in
nova
tion,
whi
ch le
ads
to a
nin
crea
se in
pro
duct
ivity
and
ove
rall
low
er p
rices
.•
Rel
atio
nshi
p be
twee
n do
mes
tic d
eman
d an
d do
mes
tic p
rice
leve
ls is
wea
kene
d du
e to
trad
e be
caus
e of
fore
ign
sour
ces
of d
eman
d –
whi
ch d
omes
tic p
olic
y m
aker
s do
not
con
trol.
In w
hat w
ays
can
glob
aliz
atio
n af
fect
the
econ
omy?
Rog
off (
2006
)•
Glo
baliz
atio
n ca
n ru
n in
reve
rse
and
hurt
mar
kets
.•
Cen
tral b
anks
hav
e le
ss im
pact
on
med
ium
and
lo
ng-te
rm d
omes
tic re
al-in
tere
st ra
tes,
but
larg
e C
Bs
like
the
Fed
hold
influ
ence
ove
r oth
er C
Bs
that
st
abili
ze th
eir c
urre
ncie
s ag
ains
t the
dol
lar.
•Lo
wer
out
put v
olat
ility
acr
oss
coun
tries
, but
som
e ha
d lo
wer
vol
atili
ty in
the
1960
’s c
ompa
red
to
1990
’s;
2000
’s s
how
a re
cent
dec
line,
but
gl
obal
izat
ion
and/
or d
eepe
r fin
anci
al m
arke
ts a
re n
ot
the
who
le re
ason
sin
ce th
ey w
ere
prev
alen
t in
the
1960
’s.
Out
put V
olat
ility
(ann
ual d
ata)
Rog
off (
2006
)•
Arg
ues
that
glo
baliz
atio
n st
eepe
nsth
e P
hilli
ps
Cur
ve.
•In
crea
sed
trade
, der
egul
atio
n an
d op
enin
g of
ec
onom
ies
crea
tes
grea
ter c
ompe
titio
n w
hich
mak
es
pric
es &
wag
es m
ore
flexi
ble.
Pric
es b
ecom
e more
sens
itive
to c
hang
es in
une
mpl
oym
ent.
•Im
plic
atio
ns fo
r mon
etar
y po
licy:
Cou
ntrie
s ar
e ke
pt to
in
flatio
n go
als
beca
use
gain
s fro
m te
mpo
rary
ex
pans
iona
ry p
olic
y ar
e di
min
ishe
d an
d th
e pr
obab
ility
of h
ighe
r inf
latio
n is
incr
ease
d.–
Cen
tral b
anks
hav
e le
ss in
cent
ive
to c
reat
e un
expe
cted
infla
tion,
so
thei
r pro
mis
es to
kee
p in
flatio
n lo
w a
re m
ore
cred
ible
.
Rog
off (
2006
)•
Sho
uld
inte
rnat
iona
l var
iabl
es b
e us
ed w
hen
deci
ding
nat
iona
l mon
etar
y po
licy
rule
s?–
Exc
hang
e R
ate:
Unl
ess
ther
e is
a v
ery
larg
e sh
ock,
they
are
too
disc
onne
cted
from
out
put a
nd in
flatio
n fig
ures
to g
ive
clea
r sig
nals
ab
out t
he e
cono
my.
–Te
rms
of T
rade
: Com
pelli
ng b
ecau
se o
f its
con
sist
ency
with
out
put
vola
tility
pas
t the
198
0’s.
Cou
ld b
e us
eful
for s
trict
infla
tion
targ
etin
g ru
les
to g
ive
cush
ioni
ng in
cas
e of
sho
cks,
but
not
nec
essa
ry fo
r m
ore
rule
s th
at in
corp
orat
e in
flatio
n and
outp
ut a
lread
y.•
Glo
baliz
atio
n ha
s be
nefit
ed e
cono
mie
s as
cen
tral b
anks
hav
e es
tabl
ishe
d cr
edib
ility.
But
. . .
•C
an c
entra
l ban
ks’m
onet
ary
polic
ies
rem
ain
stab
le a
nd
cred
ible
in th
e fa
ce o
f a s
low
dow
n or
reve
rsal
of g
loba
lizat
ion?
O’N
eill
et a
l. (2
006)
*•
Infla
tion
has
been
low
bec
ause
of s
trong
er m
onet
ary
polic
y, b
ut g
loba
lizat
ion
is a
maj
or p
art o
f inf
latio
n tre
nds.
•C
hina
’s m
iracu
lous
gro
wth
and
dev
elop
men
t has
ac
ted
as a
maj
or d
efla
tiona
ry fo
rce
thro
ugh
low
er
impo
rt pr
ices
abr
oad,
redu
ced
wag
e gr
owth
and
hig
her
prod
uctiv
ity.
•C
hina
’s a
vera
ge G
DP
gro
wth
rate
of 9
.4%
is
rem
arka
ble
but u
nsus
tain
able
–ca
n an
yone
of t
he
othe
r BR
ICs
or N
11 “d
o a
Chi
na”?
–In
dia
is th
e on
ly c
ount
ry w
ith e
noug
h gr
owth
pot
entia
l to
fill
Chi
na’s
sho
es.
*O’N
eill,
Jim
et a
l., “G
loba
lisat
ion
and
Dis
infla
tion
–C
an A
nyon
e E
lse
‘Do
A C
hina
’?,”
Gol
dman
Sac
hs G
loba
l Eco
nom
ics
Pap
er N
o: 1
47, O
ctob
er 5
, 200
6.
http
://w
ww
2.go
ldm
ansa
chs.
com
/insi
ght/r
esea
rch/
repo
rts/d
ocs/
gepa
per.p
df
Hel
bing
et a
l. (2
006)
•H
ow g
loba
lizat
ion
coul
d af
fect
infla
tion:
agg
rega
te–
Red
uces
sen
sitiv
ity o
f pric
es to
the
dom
estic
bus
ines
s cy
cle.
Thi
s m
eans
that
ther
e is
less
infla
tion
brou
ght
abou
t by
tradi
tiona
l goa
ls o
f low
une
mpl
oym
ent.
–Tr
ade
inte
grat
ion
low
ers
impo
rt pr
ices
, but
sin
ce th
is is
a
nom
inal
issu
e, w
e ca
n on
ly e
xpec
t to
take
adv
anta
ge
of th
is in
the
shor
t ter
m.
•H
ow g
loba
lizat
ion
coul
d af
fect
infla
tion:
sec
tors
–C
ompe
titio
n fro
m a
broa
d lim
its th
e ab
ility
of d
omes
tic
firm
s to
mar
k up
pric
es–
Inef
fect
ive
firm
s ar
e fo
rced
by
fore
ign
com
petit
ion
to
exit
the
mar
ket s
o av
erag
e co
st o
f pro
duct
ion
decr
ease
s•
Doe
s gl
obal
izat
ion
have
thes
e ef
fect
s?
Hel
bing
et a
l. -F
indi
ngs
•O
penn
ess
cont
ribut
ed
sign
ifica
ntly
to th
e re
duct
ion
of s
ensi
tivity
of
pric
es to
the
busi
ness
cy
cle.
•G
loba
lizat
ion
may
low
er
impo
rt pr
ices
, but
the
bene
fits
of th
is a
re o
nly
tem
pora
ry•
Acr
oss
sect
ors,
mor
e op
en s
ecto
rs h
ave
expe
rienc
ed re
lativ
ely
low
er in
flatio
n
Bor
io &
Fila
rdo
(200
6)
•G
lobe
-cen
tric
pers
pect
ive
of in
flatio
n is
gai
ning
im
porta
nce
–G
oods
from
diff
eren
t cou
ntrie
s ar
e cl
ose
subs
titut
es–
Labo
r and
cap
ital a
re m
ore
mob
ile a
cros
s bo
rder
s•
This
mea
ns in
flatio
n m
ay b
e le
ss s
ensi
tive
to
dom
estic
fact
ors
(flat
teni
ng o
f the
Phi
llips
Cur
ve)
and
mor
e se
nsiti
ve to
glo
bal f
acto
rs.
This
m
eans
that
dom
estic
act
ion
take
n to
dec
reas
e un
empl
oym
ent d
oes
not p
ut a
s m
uch
upw
ard
pres
sure
on
infla
tion.
Bor
io &
Fila
rdo
-Fin
ding
s
•D
eclin
ing
sens
itivi
ty o
f dom
estic
infla
tion
to
dom
estic
out
put g
aps
•In
crea
sing
impo
rtanc
e of
glo
bal “
econ
omic
sl
ack”
in d
omes
tic in
flatio
n
•Im
plic
atio
ns fo
r fut
ure
mon
etar
y po
licy
–S
houl
d m
onito
r glo
bal f
acto
rs–
Dom
estic
mon
etar
y po
licy
may
be
less
ef
fect
ive
beca
use
of th
e fla
tter P
hilli
ps C
urve
.
With
som
e re
serv
atio
ns, a
ll of
thes
e ar
ticle
s ag
ree
that
glo
baliz
atio
n ha
s ha
d at
leas
t som
e im
pact
on
curr
ent
infla
tion
trend
s.
Is th
is a
val
id c
oncl
usio
n?
An
Alte
rnat
e P
ersp
ectiv
e (B
all,
2006
)*
•G
loba
lizat
ion
has
NO
T be
en e
spec
ially
dra
mat
ic•
Glo
baliz
atio
n ha
s N
OT
redu
ced
the
long
-run
le
vel o
f inf
latio
n•
Glo
baliz
atio
n ha
s N
OT
affe
cted
the
stru
ctur
e of
th
e P
hilli
ps C
urve
•G
loba
lizat
ion
has
NO
T co
ntrib
uted
sub
stan
tial
nega
tive
shoc
ks to
the
infla
tion
proc
ess
*Bal
l, La
uren
ce M
., “H
as G
loba
lizat
ion
Cha
nged
Infla
tion?
”, N
atio
nal B
urea
u of
Eco
nom
ic R
esea
rch
Wor
king
Pap
er 1
2687
, Nov
embe
r 200
6,
http
://w
ww
.nbe
r.org
/pap
ers/
w12
687.
The
falla
cy o
f acc
eler
atin
g gl
obal
izat
ion
•In
tern
atio
nal t
rade
has
no
t ris
en d
ram
atic
ally
.•
U.S
. tra
de ro
se fa
ster
in
the
1990
s th
an in
the
1980
s, b
ut it
rose
eve
n fa
ster
in th
e 19
70s,
a
deca
de c
hara
cter
ized
by
high
infla
tion.
•Fi
nanc
ial i
nteg
ratio
n ha
s ris
en d
ram
atic
ally
, but
th
ere
is n
o co
here
nt
theo
ry o
n ho
w th
is m
ight
di
rect
ly in
fluen
ce in
flatio
n
The
falla
cy o
f the
ste
eper
P
hilli
ps C
urve
•A
s w
e’ve
see
n, R
ogof
f arg
ues
that
the
Phi
llips
Cur
ve s
houl
d be
com
e st
eepe
r with
gl
obal
izat
ion
•Th
is is
inco
nsis
tent
with
man
y ot
her
findi
ngs,
incl
udin
g H
elbi
ng e
t al.,
and
Bor
io
& F
ilard
o, w
hich
sho
w th
at th
e P
hillip
s C
urve
has
got
ten
flatte
r.
The
falla
cy o
f the
ste
eper
Phi
llips
C
urve
•A
ste
eper
Phi
llips
Cur
ve w
ould
mea
n th
e op
posi
te o
f wha
t we
see
in d
ata
acro
ss th
e w
orld
: higheri
nfla
tion.
–A
ste
eper
slo
pe im
plie
s th
at lo
wer
une
mpl
oym
ent
crea
tes
incr
ease
d pr
oduc
tion,
whi
ch p
uts
upw
ard
pres
sure
on
wag
es a
nd c
osts
of p
rodu
ctio
ns w
hich
th
en c
ause
s pr
ice
leve
ls to
rise
, not
dec
line.
Inf
latio
n go
es u
p in
stea
d of
dow
n if
it is
mor
e se
nsiti
ve to
un
empl
oym
ent w
hen
we
know
infla
tion
leve
ls a
re
decl
inin
g.
The
falla
cy o
f how
glo
baliz
atio
n ha
s fla
ttene
d th
e P
hilli
ps C
urve
•A
rgum
ent:
Glo
baliz
atio
n in
crea
ses
com
petit
ion,
m
akes
pric
es le
ss re
spon
sive
to o
utpu
t cha
nges
.–
Cou
nter
argu
men
t #1:
Low
er tr
end
infla
tion
has
redu
ced
the
frequ
ency
of n
omin
al p
rice
adju
stm
ents
(p
rices
are
stic
ky, b
ut th
ey fl
uctu
ate
less
ofte
n an
d ex
hibi
t les
s va
riabi
lity)
–C
ount
erar
gum
ent #
2: In
crea
sed
cred
ibili
ty o
f cen
tral
bank
s ha
s so
lidifi
ed in
flatio
n ex
pect
atio
ns, s
tabi
lizin
g ac
tual
infla
tion.
–C
ount
erar
gum
ent #
3: B
all e
stim
ates
a P
hilli
ps C
urve
eq
uatio
n th
at a
ccou
nts
for t
he le
vel o
f tra
de; f
inds
a
smal
l, an
d po
ssib
ly in
sign
ifica
nt, e
ffect
on
PC
.
The
falla
cy o
f Chi
na (a
kath
e fa
llacy
of r
elat
ive
and
impo
rt pr
ices
)•
Man
y ec
onom
ists
bel
ieve
that
gl
obal
izat
ion
has
put a
t lea
st s
ome
dow
nwar
d pr
essu
re o
n in
flatio
n th
roug
h tra
de w
ith c
ount
ries
like
Chi
na a
nd In
dia,
w
ho h
ave
rela
tivel
y lo
wer
cos
ts o
f pr
oduc
tion.
•Th
is m
ay s
ound
reas
onab
le, b
ut it
is n
ot
nece
ssar
ily fa
ct.
Why
is th
is a
falla
cy?
•Relative
pric
es a
re a
ffect
ed b
y tra
de,
whe
reas
infla
tion
affe
cts Nominal
pric
es.
•C
hina
is s
een
as a
def
latio
nary
forc
e, b
ut
this
is n
ot c
orre
ct –
Chi
na’s
exp
orts
are
ch
eap relative
to o
ther
goo
ds, s
o do
mes
tic
pric
es a
re a
ctua
lly ri
sing
relative
to C
hina
.–
So
how
cou
ld th
is c
ause
def
latio
n?
Is th
ere any
way
rela
tive
pric
es
coul
d ca
use
infla
tion?
•Th
eore
tical
ly n
o, b
ut p
ract
ical
ly y
es.
•O
PE
C a
ffect
ed in
flatio
n in
the
1970
’s
beca
use
of la
rge
year
-to-y
ear c
hang
es in
re
lativ
e pr
ices
.–
Incr
ease
s in
trad
e si
nce
the
1980
’s h
ave
had
a sm
ooth
exp
ansi
on, s
o ch
ange
s in
rela
tive
pric
es h
ave
not i
mpa
cted
infla
tion.
Wha
t doe
s th
e Fe
d co
nclu
de?
•“G
loba
lizat
ion
has
not m
ater
ially
affe
cted
th
e ab
ility
of th
e Fe
dera
l Res
erve
to
influ
ence
fina
ncia
l con
ditio
ns in
the
Uni
ted
Sta
tes,
nor
has
it le
d to
sig
nific
ant
chan
ges
in th
e pr
oces
s w
hich
det
erm
ines
th
e U
.S. i
nfla
tion
rate
. How
ever
, effe
ctiv
e m
onet
ary
polic
y m
akin
g no
w re
quire
s ta
king
into
acc
ount
a d
iver
se s
et o
f glo
bal
influ
ence
s, m
any
of w
hich
are
not
yet
fully
un
ders
tood
.”–
Ben
Ber
nank
e, M
arch
2, 2
007
Con
clus
ions
•Th
e m
ost s
igni
fican
t fac
tor i
n lo
wer
in
flatio
n tre
nds
sinc
e th
e m
id-
1970
’s/1
980’
s is
mor
e cr
edib
le m
onet
ary
polic
y.–
Cen
tral B
anks
lear
ned
a va
luab
le le
sson
ab
out t
he d
ange
rs o
f hig
h in
flatio
n.–
Glo
baliz
atio
n ha
s be
en p
ossi
ble
at c
urre
nt
leve
ls b
ecau
se o
f pol
icy
stab
ility
.
Con
clus
ions
•G
loba
lizat
ion may
have
had
some
impa
ct o
n in
flatio
n, b
ut p
roba
bly
not.
–Fi
nanc
ial g
loba
lizat
ion
has
acce
lera
ted,
but
ther
e is
no
def
initi
ve p
roof
of i
t inf
luen
cing
infla
tion.
–Th
e da
ta is
inad
equa
te to
say
any
thin
g w
ith
assu
ranc
e ab
out t
he e
ffect
of g
loba
lizat
ion
on
infla
tion.
Eve
n w
ith m
ore
data
, it s
eem
s un
likel
y on
th
eore
tical
and
pra
ctic
al g
roun
ds th
at g
loba
lizat
ion
wou
ld h
ave
a si
gnifi
cant
or m
inor
impa
ct o
n in
flatio
n.
