NCPA - National Center for Policy Analysis

HAS GLOBALIZATION CHANGED INFLATION?

June 8, 2007

Many observers have suggested that the behavior of U.S. inflation has been changed by the "globalization" of the economy.  But new evidence concludes that globalization has had little effect on the rate of inflation in the United States, according to the National Bureau of Economic Research (NBER).

While trade has increased, this has occurred slowly over many decades; the last quarter century, when U.S. inflation has been tamed, is not noteworthy for particularly rapid increases in trade.  In addition, the NBER examines the claim that globalization has weakened the link between U.S. inflation and the level of output in the U.S. economy, with economic booms causing less upward pressure on inflation:

  • Empirically, there continues to be a close association between the level of U.S. output and changes in U.S. inflation, with at most a secondary role for output in other countries.
  • A well-known study from the Bank for International Settlements has reported large effects of foreign output, but the statistical claims in that study do not withstand careful scrutiny.

Finally, the NBER examines the role of falling prices for imported goods:

  • Many policymakers and journalists cite increases in imports of low-cost goods from countries such as China and India.
  • To many observers, it seems obvious that lower prices for imports contribute to lower inflation, since inflation is an average of the economy's price changes.
  • However, as Milton Friedman pointed out long ago, changes in the price level - that is, the inflation rate - depend on monetary factors; trade with China and India reduces the relative prices of certain goods, which increases U.S. living standards, but there is no obvious effect on inflation.

Source: "Has Globalization Changed Inflation?" NBER Digest, June 2007; based upon: Laurence Ball, "Has Globalization Changed Inflation?" National Bureau of Economic Research, Working Paper No. 12687, November 2006.

For text:

http://vnber.org/digest/jun07/w12687.html

For study:

http://www.nber.org/papers/w12687

 

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