Has the rise in globalization reduced U.S. inflation in the 1990s
TL;DR: Hogan et al. as discussed by the authors investigated whether increased globalization of the U.S. economy has helped hold down inflation in the 1990s and found that the decline in inflation is explained by the interaction of increased globalization and high excess foreign capacity.
Abstract: JUANN H. HUNG [*] This article investigates whether increased globalization of the U.S. economy has helped hold down inflation in the 1990s. Based on several measures, we find that globalization has increased. Further, we find that import prices exert a greater impact on prices of products in industries faced with greater import penetration. High foreign excess capacity accounts for much of the recent decline in U.S. inflation. Our results suggest that the decline in inflation is explained by the interaction of increased globalization and high excess foreign capacity. Globalization by itself does not lead to less inflation, just greater sensitivity to foreign economic conditions. (JEL E3) I. INTRODUCTION Has the rise in globalization helped reduce U.S. inflation in the 1990s? Two hypotheses have been proposed for how the rise in globalization may have held down inflation. The first is the so-called competing-goods effect hypothesis, which contends that greater competition from foreign producers has limited the ability of domestic producers to raise prices. The second hypothesis maintains that excess capacity abroad has helped U.S. manufactures meet the robust domestic demand in the United States without straining domestic resources and pushing up inflationary pressures. This article first lays out a general framework that integrates these two hypotheses and then investigates each of them empirically. We find evidence in support of both hypotheses. To examine the competing-goods effect hypothesis, we estimate panel data regressions to find whether import prices have indeed exerted a greater impact on product prices in industries that are faced with greater import penetration. The results are affirmative. We study the second, more general hypothesis by making two inquiries. First, has the rise in globalization coincided with the breakdown of the traditional Phillips curve's ability to predict inflation that began in the early 1990s? That is, has the United States become considerably more open in the 1990s than in previous years, when the Phillips curve tracked inflation with reasonable accuracy? Second, has foreign capacity utilization played an important role, along with traditional explanatory variables, in predicting inflation? Our empirical evidence suggests that the answers to both inquires are also positive. Most striking is the finding that, by including foreign capacity utilization in the estimation of a Phillips curve equation, almost all of the missing inflation--the difference between actual inflation and predicted inflation based on the traditional Phillips curve--since 1994 disappears. Our findings suggest that the interaction of slack foreign economic conditions and greater openness to trade may have helped tame the U.S. inflation in the 1990s, but globalization alone has not permanently reduced the threat of recession or inflation. Indeed, greater globalization may even help increase inflation when the U.S. and foreign economic expansions are synchronized. No single researcher has looked at all of the questions posed in this article, but each question has been investigated separately before. Krugman (1994, 1995) and Irwin (1996) have looked at whether the United States has become more globalized over the past decade. They find that trade with the rest of the world is not a significant or rapidly growing influence on the U.S. economy. The question of whether prices of foreign goods influence domestic prices through the competing-goods effect has been investigated by Swagel (1997). He finds a statistically significant but small impact in 10 of the 19 industries in his sample. Similarly, Slaughter and Swagel (1997) find that increased globalization has had only a modest impact on wages in industrialized economies. Finally, Orr (1994) and Tootel (1998) find very little or no impact of foreign capacity utilization on domestic inflation. …
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TL;DR: The authors found no evidence that the trend decline in the sensitivity of inflation to the domestic output gap observed in many countries owes to globalization, and most surprisingly, their econometric results indicate no increase over time in the responsiveness of inflation in most countries to import prices for most countries.
Abstract: This paper evaluates the hypothesis that globalization has increased the role of international factors and decreased the role of domestic factors in the inflation process in industrial economies. Towards that end, we estimate standard Phillips curve inflation equations for 11 industrial countries and use these estimates to test several predictions of the globalization and inflation hypothesis. Our results provide little support for this hypothesis. First, the estimated effect of foreign output gaps on domestic consumer price inflation is generally insignificant and often of the wrong sign. Second, we find no evidence that the trend decline in the sensitivity of inflation to the domestic output gap observed in many countries owes to globalization. Finally, and most surprisingly, our econometric results indicate no increase over time in the responsiveness of inflation to import prices for most countries.
193 citations
TL;DR: This paper investigated the extent to which the observed changes in the inflation process can be attributed to the increasing integration of non-OECD economies into the global economy and found that import prices have become a more important driver of domestic consumer prices since the mid-1990s.
Abstract: Over the past 25 years inflation has moderated considerably in all OECD economies At the same
time, the production of many goods and services has become increasingly internationalised and the level of
trade between the OECD and non-OECD economies has risen markedly This paper investigates the extent
to which the observed changes in the inflation process can be attributed to the increasing integration of
non-OECD economies into the global economy The results of the analysis show that i) import prices have
become a more important driver of domestic consumer prices since the mid-1990s; ii) the sensitivity of
inflation to domestic economic conditions has declined whereas the sensitivity to foreign economic
conditions has risen, working through import prices; and iii) the strong GDP growth in the non-OECD
economies over the past five years has contributed to the growth of real oil and metals prices A scenario
analysis shows that globalisation has put upward pressure on inflation via higher commodity prices and
downward pressure via lower non-commodity import prices with the latter effect having dominated in most
OECD economies
145 citations
TL;DR: In this article, the effect of import competition from low-wage countries on U.S. inflationary pressure is estimated using a new methodology that identifies the causal response of prices to comparative advantage-induced supply shocks in these nations.
139 citations
TL;DR: In this article, the authors evaluate the evidence bearing on the question of whether China's buoyant export growth has led to significant changes in the import prices and thus inflation performance, of its trading partners.
Abstract: This paper evaluates the evidence bearing on the question of whether China's buoyant export growth has led to significant changes in the import prices, and thus inflation performance, of its trading partners. This evidence suggests that the impact of Chinese exports on global import prices has been, while non- negligible, fairly modest. We identify a statistically significant effect of US imports from China on US import prices, but given the size of this effect and the relatively low share of imports in US GDP, the ultimate impact on US consumer prices has likely been quite small. Moreover, imports from China had little apparent effect on US producer prices. Finally, using a multi-country database of trade transactions, we estimate that, since 1993, Chinese exports lowered annual import inflation in a large set of economies by 0.25 percentage point or less on average.
110 citations
TL;DR: This article examined the global dimension of inflation in 24 OECD countries between 1980 and 2007 in a Phillips curve framework and found that the common component of changes in unit labour costs has a notable impact on inflation.
Abstract: We examine the global dimension of inflation in 24 OECD countries between 1980 and 2007 in a Phillips curve framework. We decompose output gaps and changes in unit labour costs into common (or global) and idiosyncratic components using a factor analysis and introduce these components separately in the regression. We find that the common component of changes in unit labour costs has a notable impact on inflation. Movements in import price inflation (not driven by oil supply) and foreign competition and global interest rate developments also affect inflation. Policy makers need to carefully observe those variables when assessing inflation developments.
104 citations
Cites background from "Has the rise in globalization reduc..."
...We consider the following countries in our sample: Australia, Austria, Belgium, Canada,Denmark, Finland, France,Germany,Greece, Iceland, Ireland, Italy, Japan,Korea, Mexico, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, UK and US....
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...Results regarding import price 1Tootell (1998), Gamber and Hung (2001), Ball (2006), IMF (2006), Pain, Koske and Sollie (2006), Borio and Filardo (2007), Mody and Ohnsorge (2007), Gerlach et al. (2008), Calza (2009), Ihrig et al. (2010)....
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...…of import price inflation on domestic inflation are found by Balakrishnan and López-Salido (2002) for the UK, Galı́ and López-Salido (2001) for Spain, Gamber and Hung (2001) for the US, IMF (2006) for a panel of eight developed countries, Pain et al. (2006) for 21 developed countries and Rumler…...
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...Bentolila, Dolado and Jimeno (2008) show in their analysis for Spain that immigration has reduced the slope of the Phillips curve due to lower bargaining power of workers....
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...Their finding is confirmed for the US and the sample period 1971 to 1999 by Gamber and Hung (2001)....
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References
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01 Jan 1995
TL;DR: In the United States, the share of imports and exports in America's GDP are only about half of what they were in the United Kingdom thirty years ago as discussed by the authors. And the U.S. economy is not now, and may never be, as dependent on exports as Britain was during the reign of Queen Victoria.
Abstract: WHAT ASPECT OF the American economy has changed most in the twenty-five years since Brookings Papers on Economic Activity first began appearing? If you took a poll of economic journalists, businessmen, or policy intellectuals other than professional economists, globalization-the growing integration of the United States with the world economy-would probably top the list. It is now conventional wisdom in many circles that the growth of world trade and investment has transformed the ground rules for economic policy. Admittedly, many international economists regard the popular conviction that unprecedented globalization has changed everything as considerably exaggerated; Americans are still so taken with the novelty of extensive international trade that they have yet to acquire a sense of perspective about its importance. Even today the shares of imports and exports in America's GDP are only about half of what they were in the United Kingdom thirty years ago; the U.S. economy is not now, and may never be, as dependent on exports as Britain was during the reign of Queen Victoria. Nonetheless, international trade has certainly increased considerably since the 1960s. In 1960 the share of trade-measured as the average of imports and exports of goods and services-in America's GDP was 4.7 percent; in 1994 it was 11.4 percent, an increase of more than 100 percent. While the growth of trade has not been quite as dramatic in other advanced countries, it has also been considerable: the average OECD country had a trade share of 12.5 percent in 1960, 18.6 percent in 1990. And a number of developing countries have seen
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435 citations
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TL;DR: For instance, this article restated the conventional wisdom that high unemployment in many industrial nations is an unintended byproduct of their redistributionist welfare states, and that the problem has worsened because the attempt to promote equality has collided with market forces that are increasingly pushing the other way.
Abstract: Twenty years ago, on the eve of the first of the great post-Bretton-Woods recessions, unemployment did not appear to be a major problem for advanced economies. Among what would later be dubbed the G7 nations, the United States had the highest unemployment rate at 5.5 percent; but very little of this unemployment was long term, and the extent of short-term unemployment could be rationalized as the inevitable and even desirable result of a dynamic economy. Western Europe had an unemployment rate that, measured on a comparable basis, was only 3 percent. Japan's unemployment rate was a trivial 1.4 percent, a performance nearly matched by West Germany's 1.6 percent. Whatever their other economic and social problems, the world's industrial nations seemed to have left fears of mass unemployment far behind. Today, of course, unemployment is back with a vengeance. In Europe, in particular, the seemingly inexorable rise in the unemployment rate has led to the creation of a new word: Eurosclerosis (Chart 1). (Chart 1 omitted) The United States has not seen a comparable upward trend--indeed, the unemployment rate in 1989-90 was lower than in 1974, and the current recovery may already have pushed the unemployment rate into the same range (changes in the survey method, introduced this year, blur the picture slightly). However, many people on both sides of the Atlantic believe that the United States has achieved low unemployment by a sort of devil's bargain, whose price is soaring inequality and growing poverty. The purpose of this paper is to address the big questions about OECD unemployment: Why has it risen? Will it continue to rise? What can be done to reverse the trend? These are daunting questions. Luckily, there is no need to be original. Not only has the OECD unemployment problem been the subject of massive amounts of research, many economists have coalesced around a common view of the nature of the problem.(1) This common view does not exactly represent a consensus, since there are important dissenting voices, but it is the conventional wisdom. For the most part, this paper restates that conventional wisdom. Why is such a restatement necessary? Because while economists who think about OECD unemployment may have reached a considerable degree of agreement, educated opinion more broadly defined, and the opinion of policymakers in particular, remains far more diverse. In part, this may be because the instincts of the broader public do not accord with what the economists have to say. It may also be because the standard view is far from comforting and seems to imply some harsh choices that the public and the policymakers would rather not face. And in part, the failure of the standard economist's view to become equally standard among noneconomists may result from a failure to explain that view clearly. This last failure, at least, may be correctable. This paper is in five parts. The first part addresses the crucial distinction between cyclical and structural movements in unemployment, aka fluctuations around and movements in the natural rate. The second part lays out the central theme of the conventional wisdom about rising unemployment in advanced economies: that high unemployment in many industrial nations is an unintended byproduct of their redistributionist welfare states, and that the problem has worsened because the attempt to promote equality has collided with market forces that are increasingly pushing the other way. The third part of the paper turns to the question of the sources of the apparent tendency toward greater earnings inequality, and in particular the relative roles of globalization and technological change. Finally, the last two parts of the paper are concerned respectively with possible policies and realistic prospects. CYCLICAL VERSUS STRUCTURAL UNEMPLOYMENT The starting point for most analytical discussion of unemployment trends is the hypothesis, introduced by Friedman and Phelps a generation ago, that at any given time a national economy is characterized by a "natural rate" of unemployment. …
415 citations
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TL;DR: In this article, the authors profile the external orientation of manufacturing industries in the United States, Canada, the United Kingdom, and Japan using more than two decades of industry data, and they construct a measure of net external orientation, which is intended to capture how much an industry's use of imported inputs (a cost factor) can potentially offset exposure to the international economy through exports (a revenue factor).
Abstract: Using more than two decades of industry data, the authors profile the external orientation of manufacturing industries in the United States, Canada, the United Kingdom, and Japan. They use the term "external orientation" to describe the potential exposure of an industry's revenues and costs to world events through exports, imports, and imported inputs. For each major manufacturing industry, the authors provide histories of the share of total revenues earned in foreign markets, the role of imports in domestic consumption, and the costs of imported inputs in total production. In addition, they construct a measure of net external orientation, which is intended to capture how much an industry's use of imported inputs (a cost factor) can potentially offset exposure to the international economy through exports (a revenue factor).
197 citations
TL;DR: The most important conclusion of as discussed by the authors is that the growth rate of the money supply influences the U.S. inflation rate more strongly and promptly than in most previous studies, because the flexible exchange rate system has introduced an additional channel of monetary impact, over and above the traditional channel operating through labor market tightness.
Abstract: The most important conclusion of this paper is that the growth rate of the money supply influences the U.S. inflation rate more strongly and promptly than in most previous studies, because the flexible exchange rate system has introduced an additional channel of monetary impact, over and above the traditional channel operating through labor-market tightness. Lagged changes in the effective exchange rate of the dollar, through their influence on the prices of exports and import substitutes, help to explain why U.S. inflation was so low in 1976 and why it accelerated so rapidly in 1978. Granger causality tests indicate that lagged exchange rate changes influence inflation, but lagged inflation does not cause exchange rate changes. A policy of monetary restriction in the 1980s is shown to cut the inflation rate by five percentage points at about half the cost in lost output as compared with the consensus view from previous studies. The paper defines the "no shock natural rate of unemployment" as the unemployment rate consistent with a constant rate of inflation in a hypothetical state having no supply shocks and a constant exchange rate. A new estimate of this natural rate concept displays an increase from 5.1 percent in 1954 to 5.9 percent in 1980 that is entirely due to the much-discussed demographic shift in labor-force shares and relative unemployment rates. Other higher estimates of the natural unemployment rate, close to 7 percent in 1980, result from the use of a naive Phillips curve that relates inflation only to labor-market tightness and inertia variables. The paper contains extensive sensitivity tests that examine the behavior of the basic inflation equation over alternative sample periods; that enter the growth rate of money directly and track the behavior of a money- augmented equation in dynamic simulation experiments; and that test and reject the view that wage-setting behavior is dominated by "wage-wage inertia", that is, the dependence of wage changes mainly on their own past values.
190 citations