Some Simple Tests of the Globalization and Inflation Hypothesis


  • *The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System. We thank Steve Cecchetti, Joseph Gagnon, Peter Hooper, Michael Leahy, Sylvain Leduc, Ellen Meade, John Roberts, Torsten Slok and Mark Wynne, as well as two anonymous referees and participants in workshops at American University and the Federal Reserve Board for useful comments. Sean Fahle, Stephen Gardner and Jonas Robison provided excellent research assistance.

Jaime Marquez
Federal Reserve Board
20th and C Streets, NW
Washington, DC 20551


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.