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Friday, April 14, 2006

Inflation and Globalization

Do you believe that globalization is putting downward pressure on wages? If so, the IMF says you are right. New Economist finds new IMF research supporting the idea that globalization reduces inflation:

New Economist: IMF: How has globalisation affected inflation?: A fascinating new IMF analysis of the impact of globalisation on inflation has just been published as Chapter 3 of the latest World Economic Outlook. This chapter, 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"...

Soundbites and a webcast with Thomas Helbling, IMF Deputy Division Chief are now available online. So too is the transcript from yesterday's WEO launch. Raghu Rajan, IMF Economic Counselor and Director of Research, summarised the chapter's findings thus:

Chapter III, entitled "How has Globalization Affected Inflation?" finds that globalization has held down inflation in the past decade in a number of ways. Most people think of globalization reducing inflation by reducing the price of imported goods. This has been important at times. ...But in normal times, it is not as important as most people think. In fact, at this point, because of higher oil and commodities prices, imports are adding to headline inflation in most industrial countries.

Other channels through which globalization works have been more important and perhaps more consistently present. First, globalization may lower the inflationary response to domestic capacity constraints. Put another way, a sudden expansion in demand for goods now translates into higher imports rather than into higher prices...

Second, foreign competition has constrained wage increases in industries most open to global competition, and even lowered the sensitivity of wages to productivity increases. Of course, this does not mean globalization necessarily lowers wages, because it also spurs productivity growth itself. Nevertheless, the effect of globalization on wages will become an increasingly debated issue, especially as the share of labor income in total output of developed countries continues to fall.

The chapter concludes that despite being helpful in the past, globalization may not continue to be a crutch for central bankers to lean on. Spare capacity is decreasing worldwide, and tight domestic labor markets can also attenuate the effects of global competition on wages. Central bankers must, therefore, be prepared for their jobs to become more difficult in the period ahead.

    Posted by on Friday, April 14, 2006 at 09:29 AM in Economics, Inflation, International Finance, International Trade | Permalink  TrackBack (0)  Comments (47)

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