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Globalization, Market Structure and the Flattening of the Phillips Curve

Sophie Guilloux-Nefussi ()

Working papers from Banque de France

Abstract: The decline in the sensitivity of inflation to domestic slack observed in developed countries over the last 25 years has been often attributed to globalization. However, this intuition has so far not been formalized. I develop a general equilibrium setup that can rationalize the flattening of the Phillips curve in response to a fall in trade costs. In order to do so, I add three ingredients to an otherwise standard two-country new-Keynesian model: strategic interactions generate time varying desired markup; endogenous firm entry makes the market structure change with globalization; heterogeneous productivity allows for self-selection among firms. Because of productivity heterogeneity, only high-productivity firms (that are also the bigger ones) enter the export market. They tend to transmit less marginal cost fluctuations into inflation because they absorb them into their desired markup in order to protect their market share. At the aggregate level, the increase in the proportion of large firms reduces the pass-through of marginal cost into inflation.

Keywords: Inflation; Phillips curve; Macroeconomic Impacts of Globalization. (search for similar items in EconPapers)
JEL-codes: E31 F41 F62 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015
New Economics Papers: this item is included in nep-mac and nep-opm
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