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Globalization and inflation: A threshold investigation

Saad Ahmad and Andrea Civelli ()

Journal of Macroeconomics, 2016, vol. 48, issue C, 283-304

Abstract: We use a threshold methodology to investigate the importance of non-linear effects in the analysis of the inflation globalization hypothesis. Accounting for potential non-linearities in the Phillips Curve, we show that trade openness is not rejected as a threshold variable for the effects of domestic and foreign slack on inflation in many advanced economies, and we find a switch of the output gap slopes from one regime to the other that is consistent with the key predictions of the inflation globalization hypothesis. For some countries the threshold Phillips Curve model also leads to improvements in out-of-sample forecast over the linear Phillips models, especially at longer horizons. Contrary to most of the previous literature which ignores such non-linearities, our new approach provides some interesting empirical evidence supportive of the effect globalization has on a country’s inflation dynamics.

Keywords: Globalization; Inflation; Threshold models; Foreign output gap (search for similar items in EconPapers)
JEL-codes: E31 F02 F41 F62 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1016/j.jmacro.2016.04.005

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