Globalization and Changing Inflation Dynamics in China

Abstract

This paper investigates the changing impact of economic globalization on inflation in China over the post-reform era. We construct an inflation dynamics model with globalization factors from microeconomic foundations. Empirical results with quarterly data spanning from 1984 to 2012 show that in 1994 there was a significant structural change in the inflation dynamics model, after which China's inflation responded more significantly to foreign economic slack while the slope of the inflation-domestic slack relation reduced substantively. The finding indicates that the prescription that central banks should specifically react to developments in global output is justified for China over the post-1994 era.

Technological progress, globalization and low-inflation: Evidence from the United States

“…Therefore, we use either instrumental variables (IVs) or the GMM estimator to estimate Model (3) and eliminate the endogeneity problem. The baseline IV set includes lags of inflation and inflation expectations in the regression model, the 1–2 lagged terms of the domestic and foreign output gap, the technology variable, and the growth rate of M2 in the U.S. [63]. The optimal lag order in the model is specified by Akaike information criteria (AIC).…”

“…Our empirical specification is based on Bianchi and Civelli, Zhang and He [25, 43], who estimate an extended hybrid NKPC (HNKPC) for study globalization and inflation, in which the globalization indicator is represented by foreign output gap. The theoretical model (2) implies that HNKPC is stable in the short term, and inflation varies along a fixed HNKPC, without considering that HNKPC may move under various shocks.…”

“…The U.S. is quite an open economy today, and its trading partner’ economic performance plays an important role in the slowly solidifying recent cyclical recovery [12]. According to Bernanke [13], increased trade with China and other developing countries has led to slower growth in the prices of imported manufactured goods.…”

Money and inflation in inflation-targeting regimes – new evidence from time–frequency analysis

“…Despite this phenomenon, studies have accounted for variables, for example, foreign risky assets (De Santis, 2015), to obtain the stability of money demand in line with quantity theory. Borio and Filardo (2007) regard increasing openness of the international economy (Zhang, 2017) as a complementary explanation to a more effective monetary policy in explaining the currently satisfactory inflation performance. Cheap imports from emerging markets (Boehlke, Faldzinski, Galecki, & Osinska, 2020;Bugamelli, Fabiani, & Sette, 2015), an inflow of lower-cost labour, and the growth of productivity because of the inclusion of computer-based information technology in productive processes (Edquist & Henrekson, 2017), the rising quality of inputs (Vandenberghe, 2017), improved cyclical conditions (Buiter, 2000), or simply good luck (Stock & Watson, 2007) decrease overall price inflation.…”

Trade Exposure and the Evolution of Inflation Dynamics

“…Ball (2006) and Ihrig et al (2010) argue that there is little evidence to suggest that increased international trade and other globalization factors have attenuated the relationship between inflation and economic slack in the United States. Borio and Filardo (2007), Auer et al (2017), and Zhang (2017), on the other hand, present evidence that globalization has indeed led to 1 Recent work that studies the unusual inflation dynamics during the Great Recession and its aftermath in the United States and other advanced economies includes Stock and Watson (2010b), Ball andMazumder (2011, 2018), Gordon (2013), Friedrich (2016), Berganza et al (2016), Miles et al (2017), Blanchard (2018), and Stock and Watson (2018).…”