Flattening of the Short-run Trade-off between Inflation and Domestic Activity: The Analytics of the Effects of Globalization

This paper reviews the analytics of the effects of globalization on the Phillips curve and the utility-based objective function of the central bank. It demonstrates that in an endogenous-policy set up, when trade in goods is liberalized, financial openness increases, and in- and out-labor migration...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Razin, Assaf, Binyamini, Alon
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2007
Subjects
Globalization
Phillips curve
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Summary:This paper reviews the analytics of the effects of globalization on the Phillips curve and the utility-based objective function of the central bank. It demonstrates that in an endogenous-policy set up, when trade in goods is liberalized, financial openness increases, and in- and out-labor migration are allowed, policymakers become more aggressive on inflation and less responsive to the output gap. In other words, globalization induces the monetary authority, when guided in its policy by the welfare criterion of a representative household, to put more emphasis on the reduction of inflation variability, at the expense of an increase in the output gap variability.