Testing the Globalization of Inflation Hypothesis: Evidence for Developed Countries

Abstract

Globalization of Inflation hypothesis which is intensively discussed in the past decades mainly suggests that global factors have become dominant over domestic factors for the determination of inflation as economies become more open. This paper investigates whether this hypothesis holds for industrial countries using a panel data for 26 developed countries over 1985-2017 period. Generalized Method of Moments estimates of augmented Phillips equations for different periods reveal that world output gap’s effect on industrial countries’ inflation rates is not statistically significant. According to the findings, domestic output gap rather than foreign output gap plays a significant role on the dynamics of inflation of advanced economies as the extent of globalization rises. Additionally, import prices have considerable effect on countries’ inflation rates in the post-globalization period consistent with the increase in import penetration and globalization of production throughout the world.