Has the rise in globalization reduced U.S. inflation in the 1990s?

Authors

  • EN Gamber,

    1. Department of Economics and Business, Lafayette College, Easton, PA 18042, USA Tel: 1 610 330 5310 Fax: 1 610 330 5715 E-mail: gambere@lafayette.edu
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  • JH Hung

    1. Department of Economics and Business, Lafayette College, Easton, PA 18042, USA Tel: 1 610 330 5310 Fax: 1 610 330 5715 E-mail: gambere@lafayette.edu
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    • *

      We thank Olga Gorbachev, Michal Simpson, and Ezra Finkin for valuable research assistance. We also thank Robert Dennis, Robert Arnold, John Peterson, Fred Joutz, James DeVault, Mark Wohar, and Kim kowalewski for valuable Comments. Comments by two anonymous referees are much appreciated. Any remaining errors in the paper are our own responsibility. The views expressed in this paper as those of authors and should not be interpretd as those of the congressional Budget Office.


Abstract

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.

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