The nature of trade, global production fragmentation and inflationary dynamics: Cross‐country evidence

Abstract

AbstractThis study investigates under which circumstances trade has impact on inflation dynamics by examining the independent effects of trade intensity, intra‐industry trade and trade on value added. Trade in goods is decomposed into consumption (final) goods and intermediate inputs to deepen the assessment of the role of the globalisation of production activities on inflation dynamics. Open‐economy new Keynesian Phillips curve (NKPC) analyses suggest that inflation is sensitive to domestic factors and that the relevance of external factors changes with respect to the nature of trade, country groups and time. Vertical intra‐industry trade in intermediate inputs and value‐added trade play important role, whereas final goods trade has no statistically significant effect on inflation dynamics.