Globalisation and Inflation in OECD Countries

Abstract

During the last two decades, the world has experienced a remarkable process of disinflation, with average inflation rates in industrialized countries falling by 10 percentage points and an even sharper decline of the mean rate of inflation in developing countries. Parallel to the decline in inflation rates, a tremendous increase in economic integration -often referred to as globalisation -has been taking place. In this article, we analyse the effects of globalisation on inflation in OECD countries. We theoretically outline different channels through which globalisation may have influenced inflation dynamics and give an overview on the existing empirical evidence on this issue. In the empirical analysis we show that globalisation has contributed to the disinflation process in OECD countries since the 1980s. Inflation rates became much less prone to domestic parameters, especially the domestic output gap. Global factors such as the output gap of the main trading partners became more important in determining national inflation rates. Furthermore, economic freedom and the degree of globalisation are positively related to the disinflation process. Central bank independence seems to have contributed to the decline in inflation rates among OECD countries process, but the effect is rather modest. Though the inertia of inflation can still be observed, the persistence of inflation has considerably declined since the early 1990s.

Globalisation Effect on Inflation in the Great Moderation Era: New Evidence from G10 Countries

“…When it comes to econometric model results, however, the evidence is inconclusive concerning the hypothesis of whether globalisation has indeed significantly contributed to the inflation dynamics of these economies. For example, while supportive evidence are presented in Pain et al (2006Pain et al ( , 2008, Borio and Filardo (2007), Pehnelt (2007), Wang and Wen (2007), and also partially in Ciccarelli and Mojon (2010), negative results are reported by Ball (2006) and Ihrig et al (2010).…”

“…Most of the existing empirical studies are based on extended Phillips curve models, eg Ball (2006), Borio and Filardo (2007), Pehnelt (2007), Ihrig et al (2010), Guerrieri et al (2010) and Mihailov et al (2011). One theoretical weakness of the type of Phillips curve models is the absence of explicitly specified long-run disequilibrium effect on the inflation dynamics.…”

Globalisation Effect on Inflation in the Great Moderation Era: New Evidence from G10 Countries

“…1 See also White (2009) Pain et al (2006Pain et al ( , 2008, Borio and Filardo (2007), Pehnelt (2007), Wang and Wen (2007), Milani (2010) and also partially in Ciccarelli and Mojon (2010), negative results are reported by Ball (2006) and Ihrig et al (2010). It is thus not surprising that such studies are questioned not only on theoretical grounds but also on empirical procedures.1 F 2 The present investigation seeks to improve the commonly used empirical procedure in modelling the globalisation effects on inflation in order to produce more robust and precise evidence for future theoretical development.…”

“…6 The KOF index of globalization compiled by Swiss Economic Institute is used to represent openness in Pehnelt (2007). However, the index is only in annual frequency and the series exhibit less variation than the three indicators discussed here.…”

“…Most of the existing empirical studies are based on extended Phillips curve models, e.g., Ball (2006), Borio and Filardo (2007), Pehnelt (2007), Ihrig et al (2010), Guerrieri et al (2010) and Mihailov et al (2011). One theoretical weakness of the type of Phillips curve models is the absence of explicitly specified long-run disequilibrium effect on the inflation dynamics.…”