Working Paper: NBER ID: w15842
Authors: Pierpaolo Benigno; Ester Faia
Abstract: An important aspect of the globalization process is the increase in interdependence among countries through the deepening of trade linkages. This process should increase competition in each destination market and change the pricing behavior of firms. We present an extension of Dornbusch (1987)'s model to analyze the extent to which globalization, interpreted as an increase in the number of foreign products in each destination market, modifies the slope and the position of the New-Keynesian aggregate-supply equation and, at the same time, affects the degree of exchange-rate pass-through. We provide empirical evidence that supports the results of our model.
Keywords: Globalization; Inflation; Exchange Rate Passthrough; New Keynesian Phillips Curve
JEL Codes: E31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| globalization (F60) | competition in domestic markets (L13) |
| competition in domestic markets (L13) | passthrough of foreign marginal costs and exchange rates into import prices (F16) |
| globalization (F60) | passthrough of foreign marginal costs and exchange rates into import prices (F16) |
| competition in domestic markets (L13) | sensitivity of domestic prices to external conditions (P22) |
| sensitivity of domestic prices to external conditions (P22) | domestic inflation (E31) |
| market share of foreign products (F10) | passthrough rates (G19) |
| higher market concentration (L11) | steeper Phillips curve (E31) |
| domestic prices (P22) | domestic marginal costs (D40) |