Working Paper: CEPR ID: DP4826
Authors: Assaf Razin
Abstract: 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.
Keywords: aggregate supply; capital market openness; inflation-output tradeoff; trade openness
JEL Codes: E50; F02
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Globalization (F60) | Decrease in the relative weight of output gaps in the utility-based loss function of monetary authorities (E19) |
| Decrease in the relative weight of output gaps in the utility-based loss function of monetary authorities (E19) | More aggressive anti-inflation policies by central bankers (E63) |
| Globalization (F60) | More aggressive anti-inflation policies by central bankers (E63) |