Impact of Globalisation on economy

I have  written quite a bit on this topic, first in the form of impact of globalisation on inflation (here and here) and impact of financial globalisation (here and here).

Fed Governor Mishkin revisits the topic in his recent speech. He provides a neat summary of the impact of globalisation on all important variables- inflation, output, monetary transmission etc. There is a very rich reference list to look forward to.

a) Impact on inflation: Not really. The story is similar to what I wrote earlier. Despite many research papers on the subject, none show that globalisation has led to low inflation. There has been some impact but it is very small and not worth mentioning.

b) Impact on output: The evidence is mixed. One set of research shows

globalization may stabilize output by enabling producers to service a diversified global market rather than just the domestic market.

Other set of research shows:

Greater trade integration–including greater trade in services (Markusen, 2007)–could raise output volatility as countries become more vulnerable to foreign shocks.

Even with financial globalisation we have mixed response and we do not really know whether financial globalisation has led to lower risk or higher risk on the economy.

Mishkin however believes globalisation to be beneficial to output as both real and financial shocks are diversified. But the evidence so far is mixed.

Inflation has  come down over the years for most of the countries. Then what explains this development? Mishkin says what others have been saying- better monetary policy:

Tighter monetary policy and a commitment to price stability by central banks throughout the world have led to lower inflation and an anchoring of inflation expectations.  These policies have had huge benefits–not only the achievement of low and stable inflation but also an improvement in the overall performance of the economy.

Globalization, however, may have helped reduce inflation in more-subtle ways.  By fostering increased interactions among central banks, academics, and the public in many different countries, globalization has helped spread a common culture that stresses the benefits of achieving price stability.  The resulting increased focus on price stability has been a key reason for the reduction of inflation worldwide.

A nice summary of research available on the subject.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: