Globalization and the Phillips Curve

Abstract

This paper investigates the impact of globalization on in‡ation in the context of a two-country New Keynesian model. Three questions have been raised in the recent literature: Has globalization lowered long-run in‡ation? Has globalization aected short-run dynamics of in‡ation? Has globalization been a source of shocks for the in‡ation process? I frame these questions in terms of the eects of increased openness on dierent aspects of open-economy Phillips curves, considering dierent scenarios for the measure of in‡ation, and for the assumed export-pricing behavior of …rms. The main qualitative pre- diction of the model is that globalization makes Phillips curves ‡atter. Quantitatively, the eects of globalization on in‡ation are modest: increased openness only slightly decreases the slope of Phillips curves, domestic factors are still the main determinants of in‡ation, and globalization does not lead to a substantial increase in the volatility of shocks to the in‡ation process.

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