Globalisation and inflation: New cross-country evidence
The header refers to the title of a paper by two economists at the BIS (and this paper was the reason I was rumaging around the BIS site and came up with my last post. Basically New Economist has the details in his post How has globalisation affected inflation?. Basically NE suggests that "this chapter (in the latest IMF WEO), How Has Globalization Affected Inflation? (PDF), provides "robust support for the global competition hypothesis", with greater trade integration and foreign competition seeing falling import prices. There have also been greater restraints on domestic price and wage growth in sectors more exposed to international competition, such as textiles and electronics. However "the direct effect of globalization on inflation through import prices has in general been small in the industrial economies". The IMF however do go on to qualify this:
That said, when global spare capacity increases—such as during the 1997–98 Asian financial crises and the 2001–02 global slowdown—import price declines have had sizable effects on inflation over one- to two-year periods, shaving more than 1 percentage point off actual inflation in some advanced economies.
Stephen Roach also has a post about the Claudio Borio and Andrew Filardo paper:
BIS researchers have recently extended this analysis, arguing that a “globe-centric” framework now does a much better job in explaining inflation than does the traditional “country-centric” approach (see Claudio Borio and Andrew Filardo, “Globalisation and inflation: New cross-country evidence on the global determinants of domestic inflation,” March 2006). Their major contribution is a careful construction of several alternative versions of a “global output gap” -- in effect, a measure of the difference between aggregate supply and demand for the overall global economy. In looking at a sample of 15 major industrialized countries, Borio and Filardo find that the global output gap does a much better job in explaining fluctuations in inflation of individual economies than does the domestic output gap. In other words, to the extent that there is slack in the global economy, inflationary pressures could well remain in check -- even for those nations that have run out of spare capacity in labor and product markets at home.
Putting it more formally, Borio and Filardo’s broadest measure of the global output gap -- a GDP weighted construct -- paints a picture of good balance between worldwide supply and demand in 2005. That stands in sharp contrast with earlier periods of cyclical excess when the global output gap tipped into the danger zone, with aggregate demand exceeding supply by anywhere from 1.25% (2000) to nearly 3% (1973). That’s not to say that that the global output gap will stay constructive in the years ahead -- especially if there comes a point when the growth dynamic in the supply-driven non-US world draws increasing support from internal demand. In my view, however, that day is still very much in the future. Consequently, with the global price rule still flashing an all-clear sign, the bond market may have a very difficult time pushing nominal long-term interest rates much above current levels.
That said, when global spare capacity increases—such as during the 1997–98 Asian financial crises and the 2001–02 global slowdown—import price declines have had sizable effects on inflation over one- to two-year periods, shaving more than 1 percentage point off actual inflation in some advanced economies.
Stephen Roach also has a post about the Claudio Borio and Andrew Filardo paper:
BIS researchers have recently extended this analysis, arguing that a “globe-centric” framework now does a much better job in explaining inflation than does the traditional “country-centric” approach (see Claudio Borio and Andrew Filardo, “Globalisation and inflation: New cross-country evidence on the global determinants of domestic inflation,” March 2006). Their major contribution is a careful construction of several alternative versions of a “global output gap” -- in effect, a measure of the difference between aggregate supply and demand for the overall global economy. In looking at a sample of 15 major industrialized countries, Borio and Filardo find that the global output gap does a much better job in explaining fluctuations in inflation of individual economies than does the domestic output gap. In other words, to the extent that there is slack in the global economy, inflationary pressures could well remain in check -- even for those nations that have run out of spare capacity in labor and product markets at home.
Putting it more formally, Borio and Filardo’s broadest measure of the global output gap -- a GDP weighted construct -- paints a picture of good balance between worldwide supply and demand in 2005. That stands in sharp contrast with earlier periods of cyclical excess when the global output gap tipped into the danger zone, with aggregate demand exceeding supply by anywhere from 1.25% (2000) to nearly 3% (1973). That’s not to say that that the global output gap will stay constructive in the years ahead -- especially if there comes a point when the growth dynamic in the supply-driven non-US world draws increasing support from internal demand. In my view, however, that day is still very much in the future. Consequently, with the global price rule still flashing an all-clear sign, the bond market may have a very difficult time pushing nominal long-term interest rates much above current levels.
