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Trade Exposure and the Evolution of Inflation Dynamics

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Abstract

The diminished sensitivity of inflation to changes in resource utilization that has been observed in many advanced economies over the past several decades is frequently linked to the increase in global economic integration. In this paper, we examine this \"globalization\" hypothesis using both aggregate U.S. data on measures of inflation and economic slack and a rich panel data set containing producer prices, wages, output, and employment at a narrowly defined industry level. Our results indicate that the rising exposure of the U.S. economy to international trade can indeed help explain a significant fraction of the overall decline in responsiveness of aggregate inflation to fluctuations in economic activity. This flattening of the U.S. Phillips curve is supported strongly by our cross-sectional evidence, which shows that increased trade exposure significantly attenuates the response of inflation to fluctuations in output across industries. Our estimates indicate that the inflation-output tradeoff is about three times larger for low-trade intensity industries compared with their high-trade intensity counterparts.

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  • Simon Gilchrist & Egon Zakrajšek, 2019. "Trade Exposure and the Evolution of Inflation Dynamics," Finance and Economics Discussion Series 2019-007, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2019-07
    DOI: 10.17016/FEDS.2019.007
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    2. Banerjee, Ryan & Contreras, Juan & Mehrotra, Aaron & Zampolli, Fabrizio, 2024. "Inflation at risk in advanced and emerging market economies," Journal of International Money and Finance, Elsevier, vol. 142(C).
    3. Fabian Eser & Peter Karadi & Philip R. Lane & Laura Moretti & Chiara Osbat, 2020. "The Phillips Curve at the ECB," Manchester School, University of Manchester, vol. 88(S1), pages 50-85, September.
    4. Bobeica, Elena & Ciccarelli, Matteo & Vansteenkiste, Isabel, 2021. "The changing link between labor cost and price inflation in the United States," Working Paper Series 2583, European Central Bank.
    5. Takuji Fueki & Kohei Maehashi, 2019. "Inflation Dynamics in the Age of Robots: Evidence and Some Theory," Bank of Japan Working Paper Series 19-E-9, Bank of Japan.
    6. Dennis Bonam & Gabriele Galati & Irma Hindrayanto & Marco Hoeberichts & Anna Samarina & Irina Stanga, 2019. "Inflation in the euro area since the Global Financial Crisis," DNB Occasional Studies 1703, Netherlands Central Bank, Research Department.
    7. Andres Blanco & Mina Kim & Edward S. Knotek & Matthias Paustian & Robert W. Rich & Jane Ryngaert & Raphael Schoenle & Joris Tielens & Michael Weber & Mirko Wiederholt & Tony Zhang, 2019. "Inflation: Drivers and Dynamics 2019 Conference Summary," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2019(22), pages 1-6, December.
    8. Emilie Jasova & Bozena Kaderabkova, 2022. "The effectiveness of government measures in the first wave of Covid-19 pandemic," International Journal of Economic Sciences, European Research Center, vol. 11(1), pages 19-36, April.

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    More about this item

    Keywords

    Inflation; Phillips curve; Trade share; Globalization;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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