The Great Globalization and Changing Inflation Dynamics
by Chengsi Zhang
School of Finance and China Financial Policy Research Center, Renmin University of China
This paper investigates the changing impact of economic
globalization on U.S. inflation dynamics during the period
from 1980 to 2012. We develop an extended New Keynesian
Phillips curve incorporating richer dynamics and foreign
economic slack from microfoundations. Using unknown structural
break tests, we identify a significant structural change in
the early 1990s in the model, after which domestic inflation
responds more strikingly to the foreign than to the domestic
output gap. The finding indicates that it is plausible for the
Federal Reserve to augment its policy analysis framework with
globalization factors in the globalized world.
JEL Codes: E31, E37, E52, E58, C22.
Full article (PDF, 36 pages, 479 kb)