Abstract
Since the late 1990s, particularly since the global financial crisis, the core inflation of main developed economies’ has been persistently below target. The factors hindering the achievement of inflation targets are nothing more than commodity price, oil supply, weakness of aggregate demand, and various other factors. In addition, technology and globalization have also played a significant role. This paper uses an extended hybrid New Keynesian Phillips Curve (NKPC) model to quantify the contribution of technology and globalization variables to inflation in the United States (U.S.). The analysis suggests that technology and globalization well explain the low inflation dynamics in the U.S., as the impact of globalization on domestic inflation has been weakening over the past 20 years or so, while the impact of technology on inflation has been increasing. At present, technology exerts a greater role than globalization on low-inflation in the U.S.. This raises a different perspective for understanding the phenomenon of low inflation in the U.S. and other regions.
Highlights
The Great Recession of 2008–2009 was one of the most severe recessions in decades, and its impact on inflation dynamics in various countries has been widely researched but is not yet fully understood
Over the five years ending in December 2017, the percent change in the Consumer Price Index (CPI), at 7.25%, was the lowest rate of price increase seen in the U.S in half a century [1]
The results indicate that the domestic output gap and foreign output gap play a same size role in the hybrid New Keynesian Phillips Curve (NKPC) of the U.S after 2008, the coefficient estimate of the two variables have opposite sign and they all become significant
Summary
The Great Recession of 2008–2009 was one of the most severe recessions in decades, and its impact on inflation dynamics in various countries has been widely researched but is not yet fully understood. If the trading partner country changed to Organization for Economic Cooperation and Development (OECD) countries, the effect of the globalization indicator variable (measured by the foreign output gap) on U.S inflation was no longer significant at this time [17]. Borio & Filardo [20] provide evidence supporting the impact of globalization on inflation in OECD countries They estimate that the weighted average foreign output gap has a significant positive effect on domestic inflation, and it has shown an upward trend year by year. Using a time-varying VAR, Bianchi and Civelli [25] investigate whether global economic slack has progressively replaced the domestic output gap in driving inflation as globalization increases They conclude indicate that integration in the global economy is important, but globalization has not yet induced changes in openness large enough to justify significant brakes in inflation dynamics.
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