Globalization, Domestic Inflation and Global Output Gaps: Evidence from the Euro Area^*

Abstract

This paper tests whether the proposition that globalization has led to greater sensitivity of domestic inflation to the global output gap (the 'global output gap hypothesis') holds for the euro area. The empirical analysis uses quarterly data over the period 1979-2003. Measures of the global output gap using two different weighting schemes (based on purchasing power parities and trade data) are considered. We find limited evidence that global capacity constraints have explanatory power for domestic consumer price inflation in the euro area. Based on these findings, the prescription that central banks should specifically react to developments in global output gaps does not seem to be justified for the euro area.

Globalization and inflation: Evidence from a time-varying VAR

“…Tootell (1998) provides some earlier evidence against the GH for the Phillips Curve. Calza (2009) finds weak evidence that global capacity constraints matter for domestic inflation in the euro area. Wynne and Kersting (2007) document evidence that foreign resource utilization may play a role in U.S. inflation.…”

The Impacts of Globalization on Inflation andTransmission of Islamic Monetary Policy: Case Study in Indonesia

“…Tootell (1998) find that the globalization whose proxied by foreign output gap does not effect the United States inflation, while Milani (2009) verify the results of Gamber and Hung (2001) and Wynne and Kersting (2007) and find that global slack has become an important determinant of domestic inflation after 1985. The broadest evidence in favour of role of foreign output gap in the determination of domestic inflation of 16 OECD countries is provided by Borio and Filardo (2007), which is challenged by Ihrig et al (2007) who show that the results of Borio and Filardo (2007) are not robust to alternate measures of foreign output gap.The evidence against the role of the foreign output gap in the determination of domestic ination is also provides by Hooper et al (2006), Ball (2006, Koske et al (2010) and Calza (2009).The second important implication of the relationship between globalisation and inflation is that sensitivity of domestic inflation to domestic output gap is decreasing with increased globalization which implies that the Phillips Curve has become flatter. Evidence on the flattening of Phillips Curve is abundant in industrial economies.However, there is unsettled debate in literature that it is due to improved monetary policy framework or increased globalization (Fatima, 2013).The impact of globalisation on inflation is further analysed by using a Phillips Curve augmented with an interaction term between domestic output gap and trade openness.…”

Inflation in New EU Member States: A Domestically or Externally Driven Phenomenon?

“…This finding is not firmly corroborated by other studies. For instance, Calza (2009), inter alia, reviews the voluminous literature on this topic. The author stresses that the global output gap has mostly not been found significant for the US inflation, just as for the OECD countries (Pain et al 2006;Ihrig et al 2007).…”