Globalisation Effect on Inflation in the Great Moderation Era: New Evidence from G10 Countries

Abstract

The effect of globalisation on inflation is modelled and simulated for ten countries from G10 during the Great Moderation period. The results are supportive of the globalisation hypothesis. In particular, the results show that dynamic channels and magnitudes of globalisation to domestic inflation are highly heterogeneous from country to country, that increases in trade openness could be either inflationary or deflationary, while increased imports from low-cost emerging-market economies have been mostly deflationary, and that there has been almost no direct globalisation impact as far as inflation persistence is concerned while the impact on inflation variability can be positive as well as negative. Overall, globalisation is shown to have contributed positively to the aspect of low inflation rather than that of stable inflation during the Great Moderation era.JEL classification: C52, E31, E37, F41

Money Supply, Class Power, and Inflation

“…First, labor productivity growth should be negatively correlated with inflation, as an increase in wages and demand will exert less inflationary pressure if it is accompanied by increasing output from higher labor productivity. Also, some authors attribute recent low inflation to globalization, which results in cheap imports from low-wage countries (Auer and Fischer 2010; Qin and He 2012; White 2008). Furthermore, we expect that a change in the oil price will have a significant impact on the inflation rate (see Cunado and Gracia 2003).…”

“…3 Although not yet confirmed, theory suggests that inflation influences wage share. This is because wages and capital income will adjust to increasing prices at different rates (Raffalovich et al 1992; see also Hibbs 1987). This brings the possibility of reverse causality.…”

“…Right-wing leaders also attacked organized labor directly, as exemplified by Thatcher's defeat of the coal miners' strike in 1984 to 1985, and Reagan's crushing of the air traffic controllers' strike in 1981. They deregulated capital-labor relations to make employment less secure and wages less guaranteed (Akard 1992;McCartin 2011;Prechel 2000;Raffalovich, Leicht, and Wallace 1992). These assaults on labor, in tandem with structural changes, such as manufacturing outsourcing, computerization, and financialization, significantly weakened the working class's bargaining power and income share, boosting income inequality (Bluestone and Harrison 1988;Harvey 1991;Kristal 2013;Lin and Tomaskovic-Devey 2013).…”