Offshoring and Inflation

Diego Comin and Robert Johnson

No 15387, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Did trade integration suppress inflation in the United States? We say no, in contradiction to the conventional wisdom. Our answer leverages two basic facts about the rise of trade: offshoring accounts for a large share of it, and it was a long-lasting, phased-in shock. Incorporating these features into a New Keynesian model, we show trade integration was inflationary. This result continues to hold when we extend the model to account for US trade deficits, the pro-competitive effects of trade on domestic markups, and cross-sector heterogeneity in trade integration in a multisector model. Further, using the multisector model, we demonstrate that neither cross-sector evidence on trade and prices, nor aggregate time series price level decompositions are informative about the impact of trade on inflation.

Date: 2020-10
New Economics Papers: this item is included in nep-dge, nep-int, nep-mac and nep-mon
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