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Globalization, Market Structure and Inflation Dynamics

Author

Listed:
  • S. Guilloux-Nefussi
Abstract
The sensitivity of inflation to domestic slack has declined in developed countries since the mid-1980s. This article shows why this might result from globalization favoring concentration. To do so, I add three ingredients to an otherwise standard general equilibrium two-country new-Keynesian model. (1) Strategic interactions generate a time-varying desired markup; (2) endogenous entry and (3) heterogeneous productivity engender a self-selection of the most productive firms (which are also the largest ones) in international trade. Hence, the weight of large firms in domestic production increases in response to a fall in international trade costs. These large firms transmit less marginal cost fluctuations to price adjustments, rather absorbing them into their desired markup to protect their market share. At the aggregate level, this leads to domestic inflation reacting less to real activity fluctuations.

Suggested Citation

  • S. Guilloux-Nefussi, 2016. "Globalization, Market Structure and Inflation Dynamics," Working papers 610, Banque de France.
    • Handle: RePEc:bfr:banfra:610
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    Cited by:

    1. Szafranek, Karol, 2017. "Flattening of the New Keynesian Phillips curve: Evidence for an emerging, small open economy," Economic Modelling, Elsevier, vol. 63(C), pages 334-348.
    2. Lodge, David & Pérez, Javier J. & Albrizio, Silvia & Everett, Mary & De Bandt, Olivier & Georgiadis, Georgios & Ca' Zorzi, Michele & Lastauskas, Povilas & Carluccio, Juan & Parrága, Susana & Carvalho,, 2021. "The implications of globalisation for the ECB monetary policy strategy," Occasional Paper Series 263, European Central Bank.
    3. Mayumi Ojima & Junnosuke Shino & Kozo Ueda, 2018. "Retailer Market Concentration, Buyer-Size Discounts and Inflation Dynamics," The Japanese Economic Review, Springer, vol. 69(1), pages 101-127, March.
    4. Mirko Abbritti & Mr. Sebastian Weber, 2019. "Market Regulation, Cycles and Growth in a Monetary Union," IMF Working Papers 2019/123, International Monetary Fund.
    5. Aquilante, Tommaso & Dogan, Aydan & Firat, Melih & Soenarjo, Aditya, 2024. "Global value chains and the dynamics of UK inflation," Bank of England working papers 1060, Bank of England.
    6. Sophie Guilloux-Nefussi, 2017. "Globalisation and industry concentration: What are the consequences for inflation dynamics?," Rue de la Banque, Banque de France, issue 45, june..
    7. Kitenge, Erick, 2021. "The Linder hypothesis during the globalization era," Economics Letters, Elsevier, vol. 200(C).

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    More about this item

    Keywords

    Inflation; Impact of Globalization; Strategic Interactions; Market Structure; Phillips Curve;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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