Global value chains and the dynamics of UK inflation

Tommaso Aquilante, Aydan Dogan, Melih Firat () and Aditya Soenarjo ()
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Tommaso Aquilante: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Melih Firat: International Monetary Fund
Aditya Soenarjo: London School of Economics

No 1060, Bank of England working papers from Bank of England

Abstract: This paper explores the link between the UK’s participation in global value chains (GVCs) and inflation dynamics. Using sectoral data, we find evidence indicating that UK industries with higher proportions of imported inputs from emerging market economies (EMEs) exhibit a flatter Phillips curve. We then build a two-country model with input-output linkages and demonstrate analytically that an increased reliance on imported intermediate goods, serving as a proxy for GVCs, results in a flatter Phillips curve. Additionally, GVC integration affects inflation dynamics through the influence of cyclical forces that shape firms’ marginal costs via terms of trade fluctuations. Specifically, we highlight how the limited business cycle correlation between the UK economy and EMEs reduces the pass-through of domestic shocks to prices.

Keywords: Global value chains; inflation dynamics; Phillips curve (search for similar items in EconPapers)
JEL-codes: E30 E31 E32 F10 F14 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2024-02-09
New Economics Papers: this item is included in nep-ifn, nep-int, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1060

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