Globalization and Inflation Dynamics: Empirical Evidence from a Time-varying New-Keynesian Phillips Curve

Abstract: There is a debate on whether globalization causes the flattening of Phillips curve. We explore this question by estimating a modified New-Keynesian Phillips curve (NKPC) in which inflation is determined by both domestic and foreign factors. Contrary to most of previous literature, we find that from 1984 to 2006, globalization raised the slope of the NKPC by about 0.015 in U.S economy. In addition, globalization shifts the NKPC downward by introducing cheaper imported goods. Our result is robust when we consider different maximization tools and potential heterogeneity. We conclude that globalization indeed changed the domestic inflation dynamics by steepening and shifting the NKPC.