IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/4895.html
   My bibliography  Save this paper

Globalization and Disinflation: The Efficiency Channel

Author

Listed:
  • Razin, Assaf
  • Loungani, Prakash

Abstract

The paper analyses how globalization forces induce monetary authorities, guided in their policies by the welfare criterion of a representative household, to put greater emphasis on reducing the inflation rate than on narrowing the output gaps. We demonstrate that the marginal rate of substitution between the output gap and the inflation (at a constant value of the utility-based loss function) rises when the economy is opening up to international trade in goods, and is integrated to the world capital markets. We associate the marginal rate of substitution with the sacrifice ratio, and provide evidence on trade and capital openness effects on inflation, through the efficiency channel.

Suggested Citation

  • Razin, Assaf & Loungani, Prakash, 2005. "Globalization and Disinflation: The Efficiency Channel," CEPR Discussion Papers 4895, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4895
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP4895
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1169-1189.
    2. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    3. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, vol. 68(2), pages 348-352, May.
    4. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, in: Monetary Policy, pages 155-193, National Bureau of Economic Research, Inc.
    5. David Romer, 1998. "A New Assessment of Openness and Inflation: Reply," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(2), pages 649-652.
    6. David Romer, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(4), pages 869-903.
    7. Scott, Andrew & Imbs, Jean & Chen, Natalie, 2004. "Competition, Globalization and the Decline of Inflation," CEPR Discussion Papers 4695, C.E.P.R. Discussion Papers.
    8. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 707-734.
    9. Assaf Razin & Chi-Wa Yuen, 2001. "The "New Keynesian" Phillips Curve: Closed Economy vs. Open Economy," NBER Working Papers 8313, National Bureau of Economic Research, Inc.
    10. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
    11. Richard N. Cooper, 1999. "Should Capital Controls be Banished?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 89-142.
    12. Razin, Assaf & Yuen, Chi-Wa, 2002. "The 'New Keynesian' Phillips curve: closed economy versus open economy," Economics Letters, Elsevier, vol. 75(1), pages 1-9, March.
    13. Loungani, Prakash & Razin, Assaf & Yuen, Chi-Wa, 2001. "Capital mobility and the output-inflation tradeoff," Journal of Development Economics, Elsevier, vol. 64(1), pages 255-274, February.
    14. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
    15. Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, vol. 42(3-4), pages 327-347, May.
    16. Quinn, Dennis, 1997. "The Correlates of Change in International Financial Regulation," American Political Science Review, Cambridge University Press, vol. 91(3), pages 531-551, September.
    17. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mahir Binici & Yin-Wong Cheung & Kon S. Lai, 2011. "Trade Openness, Market Competition, and Inflation: Some Sectoral Evidence from OECD Countries," CESifo Working Paper Series 3690, CESifo.
    2. W. Michael Cox, 2007. "Globalization, aggregate productivity, and inflation," Staff Papers, Federal Reserve Bank of Dallas, issue Mar.
    3. Sandra Eickmeier & Katharina Pijnenburg, 2013. "The Global Dimension of Inflation – Evidence from Factor-Augmented Phillips Curves," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(1), pages 103-122, February.
    4. Ernest Gnan & Maria Teresa Valderrama, 2006. "Globalization, Inflation and Monetary Policy," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 37-54.
    5. Ernst Glatzer & Ernest Gnan & Maria Teresa Valderrama, 2006. "Globalization, Import Prices and Producer Prices in Austria," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 24-43.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Assaf Razin & Prakash Loungani, 2005. "US Monetary Policy Announcements and the Term Structure of Interest Rate Differentials: Evidence from Hong Kong and Singapore," Working Papers 102005, Hong Kong Institute for Monetary Research.
    2. Razîn, Assaf & Binyamini, Alon, 2007. "Flattening of the Short-run Trade-off between Inflation and Domestic Activity: The Analytics of the Effects of Globalization," Kiel Working Papers 1363, Kiel Institute for the World Economy (IfW Kiel).
    3. Assaf Razin & Prakash Loungani, 2005. "Globalization and Inflation-Output Tradeoffs," NBER Working Papers 11641, National Bureau of Economic Research, Inc.
    4. Assaf Razin & Prakash Loungani, 2005. "Globalization and Equilibrium Inflation-Output Tradeoffs," NBER Chapters, in: NBER International Seminar on Macroeconomics 2005, pages 171-192, National Bureau of Economic Research, Inc.
    5. Assaf Razin, 2004. "Aggregate Supply and Potential Output," NBER Working Papers 10294, National Bureau of Economic Research, Inc.
    6. Christopher Bowdler, 2003. "Openness and the Output-Inflation Tradeoff," Economics Papers 2003-W04, Economics Group, Nuffield College, University of Oxford.
    7. Assaf Razin & Alon Binyamini, 2007. "Flattened Inflation-Output Tradeoff and Enhanced Anti-Inflation Policy: Outcome of Globalization?," NBER Working Papers 13280, National Bureau of Economic Research, Inc.
    8. Alon Binyamini & Assaf Razin, 2008. "Inflation-Output Tradeoff As Equilibrium Outcome of Globalization," Israel Economic Review, Bank of Israel, vol. 6(1), pages 109-134.
    9. Bowdler, Christopher, 2009. "Openness, exchange rate regimes and the Phillips curve," Journal of International Money and Finance, Elsevier, vol. 28(1), pages 148-160, February.
    10. D'Amato, Marcello & Martina, Riccardo, 2005. "Credibility and commitment of monetary policy in open economies," European Journal of Political Economy, Elsevier, vol. 21(4), pages 872-902, December.
    11. Tamim Bayoumi & Giovanni Dell'Ariccia & Karl F Habermeier & Tommaso Mancini Griffoli & Fabian Valencia, 2014. "Monetary Policy in the New Normal," IMF Staff Discussion Notes 14/3, International Monetary Fund.
    12. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
    13. Stanley Fischer, 1995. "Modern Approaches to Central Banking," NBER Working Papers 5064, National Bureau of Economic Research, Inc.
    14. Alon Binyamini & Assaf Razin, 2007. "Flattened Inflation-Output Tradeoff and Enhanced Anti-Inflation Policy as an Equilibrium Outcome of Globalization," Working Papers 232007, Hong Kong Institute for Monetary Research.
    15. Joseph Daniels & David VanHoose, 2009. "Trade Openness, Capital Mobility, and the Sacrifice Ratio," Open Economies Review, Springer, vol. 20(4), pages 473-487, September.
    16. Sergio Rossi, 2004. "Inflation Targeting and Sacrifice Ratios : The Case of the European Central Bank," International Journal of Political Economy, Taylor & Francis Journals, vol. 34(2), pages 69-85.
    17. Erasmus K. Kersting & Mark A. Wynne, 2007. "Openness and inflation," Staff Papers, Federal Reserve Bank of Dallas, issue Apr.
    18. William C. Gruben & Darryl McLeod, 2001. "Capital account liberalization and disinflation in the 1990s," Center for Latin America Working Papers 0101, Federal Reserve Bank of Dallas.
    19. Jeffrey C. Fuhrer, 1994. "Goals, guidelines and constraints facing monetary policymakers: proceedings of a conference held at North Falmouth, Massachusetts in June 1994," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38.
    20. Andrew Pickering & Hector Valle, 2008. "Openness, imported commodities and the Phillips Curve," Bristol Economics Discussion Papers 08/608, School of Economics, University of Bristol, UK.

    More about this item

    Keywords

    Trade openness; Capital-account openness; Utility-based loss function;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:4895. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.