Competition, Globalization and the Decline of Inflation

Andrew Scott, Jean Imbs and Natalie Chen

No 4695, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We investigate theoretically and empirically the competitive effects of increased trade on prices, productivity and markups. Using disaggregated data for EU manufacturing over the period 1988-2000 we find increased openness exerts a negative and significant impact on sectoral prices. Increased openness lowers prices by both reducing markups and raising productivity. In response to an increase in openness, markups show a steep short run decline, which partly reverses later, while productivity rises in a manner that increases over time. Our estimates suggest that EU manufacturing prices fell by 2.3%, productivity rose by 11% and markups fell by 1.6% in response to the observed increase in manufacturing imports. The direct price restraint caused by greater imports, assuming unchanged monetary policy, can explain a fall in inflation of up to 0.14% per annum. The most substantial impact on inflation arises, however, from the role of lower markups in reducing the inflation bias of monetary policy. Our results suggest that increased trade could account for as much as a quarter of European disinflation over this period.

Keywords: Competition; Globalization; inflation; Markups; Openness; Prices; Productivity; Trade (search for similar items in EconPapers)
JEL-codes: E31 F12 F14 F15 L16 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (67)

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