A time-varying Phillips curve with global factors: Are global factors important?

Increased globalization and trade have integrated the world, but whether they are the underlying drivers of the flattening of the Phillips curve slope is not clear. This problem is further complicated since time-varying parameters are empirically important in most applications as the role of global factors may change over time. This paper investigates empirically the role played by global and domestic factors in driving dynamics in inflation using a panel data comprising of 23 advanced (AEs) and 11 emerging market economies (EMEs), from 1995Q1 to 2018Q1. The results indicate the predominance and increasing importance of global factors in explaining inflation dynamics, especially for EMEs. The Phillips curve is flat for both groups, but it is flatter in AEs. The results are consistent with the theoretical view that increased globalization and trade are underlying factors behind the flattening of the Phillips curve.

Automated summary

This paper empirically investigates the role of global and domestic factors in driving dynamics in inflation using panel data. The results show the predominance of global factors in explaining inflation dynamics, especially for emerging market economies. The Phillips curve is flat for both advanced economies and emerging market economies, but flatter for the former. The findings are consistent with the theoretical view that increased globalization and trade are underlying factors behind the flattening of the Phillips curve.