How Have Shanghai, Saudi Arabia, and Supply Chains Affected U.S. Inflation Dynamics?
Name
27-44Forbes19Q1.pdf
Description
Accepted version
Size
710.8 KB
Format
Adobe PDF
Checksum (MD5)
e6a6b3fed568abe52d22b8370c490c1a
Author(s)
Forbes, Kristin J
Date Issued
January 2019
Journal
Federal Reserve Bank of St. Louis Review
Publisher
Federal Reserve Bank of St. Louis
Citation
Forbes, Kristin J. "How Have Shanghai, Saudi Arabia, and Supply Chains Affected U.S. Inflation Dynamics?." Federal Reserve Bank of St. Louis Review 101, 1 (January 2019): 27-43 © 2018 Federal Reserve Bank of St. Louis
Version
Author's final manuscript
Abstract
Understanding and forecasting inflation has always been a key focus of macroeconomics and monetary policymaking. Historically, many macroeconomists and central banks have relied on the "Phillips curve" framework for this purpose. Recently, however, the Phillips curve framework has not been performing well. This article examines a number of possible explanations for the breakdown of the "Phillips curve" relationship between slack and inflation. These explanations include the possibility that the curve may have flattened or shifted, that standard measures may not be capturing key aspects of the relationship, or that a series of "unfortunate" and unprecedented events may have obscured the underlying relationship. Each of these explanations has some merit and support, but each seems unable to explain how inflation dynamics have evolved over the past decade. This article suggests that what is missing is a more comprehensive treatment of how globalization has affected domestic prices, through channels such as increased trade flows, the greater economic heft of emerging markets, and increased ease of using global supply chains to shift parts of production to cheaper locations. This greater role for globalization in explaining inflation, however, does not mean that the standard Phillips curve framework is "dead." Rather, macroeconomists and monetary policymakers should update their existing models in two key ways: to include global parameters more explicitly and allow these parameters to adjust over time with the world economy.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
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DOI of Published Version
https://doi.org/10.20955/r.101.27-43
