Kiel Working Papers, Kiel Institute for World Economics
No 1363:
Flattening of the Short-run Trade-off between Inflation and Domestic Activity: The Analytics of the Effects of Globalization
Assaf Razin and Alon Binyamini
Abstract: 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.
34 pages, June 2007
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