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Globalization and Inflation Dynamics: the Impact of Increased Competition

Argia Sbordone

No 13556, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper analyzes the potential effect of global market competition on inflation dynamics. It does so through the lens of the Calvo model of staggered price-setting, which implies that inflation depends on expected future inflation and a measure of marginal costs. I modify the assumption of a constant elasticity of demand, standard in this model, to provide a channel through which an increase in the number of traded goods may affect the degree of strategic complementarity in price setting, and hence alter the dynamic response of inflation to marginal costs. I first discuss the behavior of the variables that drive the impact of trade openness on this response, and then I evaluate whether an increase in the variety of traded goods of the size observed in the US in the `90s might have a sizable quantitative impact. I find that it is difficult to argue that such an increase in trade should have generated an increase in US market competition leading to a decline in the slope of the inflation-marginal cost relation.

JEL-codes: E31 (search for similar items in EconPapers)
Date: 2007-10
New Economics Papers: this item is included in nep-cba, nep-com, nep-int and nep-mac
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (62)

Published as Globalization and Inflation Dynamics: The Impact of Increased Competition , Argia M. Sbordone. in International Dimensions of Monetary Policy , Galí and Gertler. 2009

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Working Paper: Globalization and inflation dynamics: the impact of increased competition (2008) Downloads
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