Working Paper: CEPR ID: DP15387
Authors: Diego Comin; Robert Johnson
Abstract: Did trade integration suppress inflation in the United States? We say no, in contradiction to the conventional wisdom. Our answer leverages two basic facts about the rise of trade: offshoring accounts for a large share of it, and it was a long-lasting, phased-in shock. Incorporating these features into a New Keynesian model, we show trade integration was inflationary. This result continues to hold when we extend the model to account for US trade deficits, the pro-competitive effects of trade on domestic markups, and cross-sector heterogeneity in trade integration in a multisector model. Further, using the multisector model, we demonstrate that neither cross-sector evidence on trade and prices, nor aggregate time series price level decompositions are informative about the impact of trade on inflation.
Keywords: Offshoring; Inflation; Trade Integration; New Keynesian Model
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade integration (F15) | inflation (E31) |
| offshoring (F23) | trade integration (F15) |
| offshoring (F23) | domestic production costs (D24) |
| domestic production costs (D24) | inflation (E31) |
| trade integration (F15) | domestic sourcing shares (F23) |
| domestic sourcing shares (F23) | inflation (E31) |
| anticipated future declines in domestic sourcing (F17) | current inflation (E31) |
| trade integration (F15) | consumer price inflation (E31) |