Globalization, Taylor rulesand inflation

Abstract

This article provides evidence that globalization has contributed to global disinflation by making policy makers more aggressive towards fighting inflation. We estimate Taylor rules for 83 countries over the period 1985 to 2004 and find that the relative weight attached to the output gap is negatively related to trade and financial openness in a simple cross-section model. This result does not hold up for the OECD subsample, suggesting that this group of countries has successfully solved the time inconsistency problem and uncoupled central bank behaviour from otherwise relevant determinants of the inflation bias.

Notes

¹For some countries, a smaller time period had to be used due to data availability. Moreover, the estimates for the euro area countries end in 1998.

²For some countries (CHL, GBR, MYS, SLV, MDG, GTM), the data were supplemented using short term interest rates from the International Financial Statistics (IFS) and the Economist Intelligence Unit (EIU) database.

³Leaving the estimates unrestricted produces negative coefficients for β₁ or β₂ for several countries. This could sometimes be resolved by respecifying the Taylor rule (using a dynamic variant or alternative lag structures), but the estimates from such country-specific rules would be very difficult to compare. Thus, we prefer a common approach to all countries.