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Globalization, Market Structure and Inflation Dynamics

Sophie Guilloux-Nefussi ()

Working papers from Banque de France

Abstract: The sensitivity of inflation to domestic slack has declined in developed countries since the mid-1980s. This article shows why this might result from globalization favoring concentration. To do so, I add three ingredients to an otherwise standard general equilibrium two-country new-Keynesian model. (1) Strategic interactions generate a time-varying desired markup; (2) endogenous entry and (3) heterogeneous productivity engender a self-selection of the most productive firms (which are also the largest ones) in international trade. Hence, the weight of large firms in domestic production increases in response to a fall in international trade costs. These large firms transmit less marginal cost fluctuations to price adjustments, rather absorbing them into their desired markup to protect their market share. At the aggregate level, this leads to domestic inflation reacting less to real activity fluctuations.

Keywords: Inflation; Impact of Globalization; Strategic Interactions; Market Structure; Phillips Curve (search for similar items in EconPapers)
JEL-codes: E31 F41 F62 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2016
New Economics Papers: this item is included in nep-dge, nep-int, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
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