The Great Globalization and Changing Inflation Dynamics

Chengsi Zhang

International Journal of Central Banking, 2017, vol. 13, issue 4, 191-226

Abstract: This paper investigates the changing impact of economic globalization on U.S. inflation dynamics during the period from 1980 to 2012. We develop an extended New Keynesian Phillips curve incorporating richer dynamics and foreign economic slack from microfoundations. Using unknown structural break tests, we identify a significant structural change in the early 1990s in the model, after which domestic inflation responds more strikingly to the foreign than to the domestic output gap. The finding indicates that it is plausible for the Federal Reserve to augment its policy analysis framework with globalization factors in the globalized world.

Date: 2017
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