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Globalization, Domestic Inflation and Global Output Gaps: Evidence from the Euro Area *
Author(s) -
Calza Alessandro
Publication year - 2009
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/j.1468-2362.2009.01248.x
Subject(s) - economics , output gap , inflation (cosmology) , globalization , purchasing power , explanatory power , monetary economics , macroeconomics , econometrics , international economics , monetary policy , market economy , philosophy , physics , epistemology , theoretical physics
This paper tests whether the proposition that globalization has led to greater sensitivity of domestic inflation to the global output gap (the ‘global output gap hypothesis’) holds for the euro area. The empirical analysis uses quarterly data over the period 1979–2003. Measures of the global output gap using two different weighting schemes (based on purchasing power parities and trade data) are considered. We find limited evidence that global capacity constraints have explanatory power for domestic consumer price inflation in the euro area. Based on these findings, the prescription that central banks should specifically react to developments in global output gaps does not seem to be justified for the euro area.