Chapter

Globalization and Inflation Dynamics

Argia M. Sbordone

in International Dimensions of Monetary Policy

Published by University of Chicago Press

Published in print March 2010 | ISBN: 9780226278865
Published online February 2013 | e-ISBN: 9780226278872 | DOI: http://dx.doi.org/10.7208/chicago/9780226278872.003.0011
Globalization and Inflation Dynamics

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This chapter systematically addresses how globalization may have influenced the short-run Phillips curve trade-off between inflation and output. A Phillips curve relation is developed that originates from optimization-based price setting at the individual firm level. It is believed that globalization induces a rise in competition through the increase in the number of goods varieties available. It is then explicitly shown how the degree of competition influences the relation between inflation and movements in real marginal cost. The weaker this relation, the more difficult it is to stabilize inflation without incurring undesirable output losses. The results shows that the impact of increased competition from globalization has an ambiguous effect on the short-run trade-off between inflation and real activity, though for large changes in the number of goods varieties the sensitivity of inflation to changes in real marginal costs declines, thus flattening the slope of the Phillips curve through this mechanism.

Keywords: globalization; short-run; Phillips curve; inflation; marginal cost; trade-off

Chapter.  15869 words.  Illustrated.

Subjects: Macroeconomics and Monetary Economics

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