Two Essays on Globalization and Inflation
This dissertation consists of two essays studying the impact of globalization on the inflation dynamics.Inflation has considerably decreased and its volatility has sharply fallen since the 1980s in industrial countries. The first essay aims at assessing to which extent globalization, defined as a fall in iceberg trade costs, may account for the moderation of inflation over the last three decades. I develop a 2-country new-Keynesian stochastic general equilibrium model with oligopolistic competition -that generates strategic interactions- and endogenous firm entry. In the long run, globalization triggers endogenous changes in the market structure and in the degree of openness, which in turn affects the short run dynamics of inflation. Simulating the model with productivity, government spending and monetary policy shocks, I find that globalization slightly dampens the volatility of inflation. The decline in the volatility of inflation is not due to a flattening of the Phillips curve, but to foreign factors: a decrease in relative import prices or an increase in the number of foreign firms (extensive margin of trade) both weigh down on the desired markup of domestic firms and reduce inflation in the short run.The second essay considers the decline in the sensitivity of inflation to domestic slack observed in developed countries over the last 25 years. This flattening of the Phillips curve has been often attributed to globalization. However, this intuition has so far not been formalized. I develop a general equilibrium setup that can rationalize the flattening of the Phillips curve in response to a fall in trade costs. In order to do so, I add three ingredients to an otherwise standard two-country new-Keynesian model: strategic interactions generate time varying desired markup; endogenous firm entry makes the market structure change with globalization; heterogeneous productivity allows for self-selection among firms. Because of productivity heterogeneity, only high-productivity firms (that are also the bigger ones) enter the export market. They tend to transmit less marginal cost fluctuations into inflation because they absorb them into their desired markup in order to protect their market share. At the aggregate level, the increase in the proportion of large firms reduces the pass-through of marginal cost into inflation.
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