DP4826 Globalization and Disinflation: A Note

Author(s): Assaf Razin
Publication Date: January 2005
Keyword(s): aggregate supply, captial market openness, inflation-output tradeoff, trade openness
JEL(s): E50, F02
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4826

We analyse how globalization forces induce monetary authorities, guided in their policies by the welfare criterion of a representative household, to put greater emphasis on reducing the inflation rate than on narrowing the output gaps. Specifically, I demonstrate how the relative weight of the output gap term in a utility-based loss function shrinks when the economy is open to international trade in goods, and is integrated to the world capital markets.