Discussion of Benigno & Faia
“Globalization, Pass-Through and Inflation Dynamic”
Institute for Monetary and Economic Studies,Bank of Japan
2010 International Conference
Future of Central Banking under Globalization
May 26-27, 2010Mark A. Wynne
Federal Reserve Bank of Dallas

Some facts• Phillips Curve instability– Declining responsiveness of inflation to domesticslack• Pass through of exchange rate changes todomestic prices• Divergent behavior of the prices of (traded)
goods and (nontraded) services

Prices of major components of US GDP
120

GDP: Structures: Chain
Price Index

100

GDP: Services: Chain
Price Index

80GDP: Goods: Chain PriceIndex

60

GDP: Chain Price Index

40
2001929

1939

1949

1959

1969

1979

1989

1999

2009

Some facts• Phillips Curve instability– Declining responsiveness of inflation to domestic slack(e.g. Roberts (2006))• Pass through of exchange rate changes todomestic prices• Divergent behavior of the prices of (traded)
goods and (nontraded) services• Globalization– Financial globalization– Real globalization

The contribution of this paper• Theory– Globalization leads to greater pass through– Globalization changes the slope and position of theNew Keynesian Phillips Curve (the “global slackhypothesis”)• Empirics– Pass through has increased post 2001 due toglobalization– Support for the global slack hypothesis: Importance ofthe relative price channel (sectoral terms of trade) inexplaining US inflation dynamics

The key mechanism• Time varying elasticity of demand:

i    (  )i

Main results• Pass through 1    1sf
1  s f
N1




1
 1    1
St1
 1  N

Pˆf ,t1

• Phillips Curve11ˆh ,t  k  mct  h ,t   Et h ,t 1
 N 


Main results• Phillips Curveh ,t  k  mct  s f Pˆf ,t  Pˆh ,t   Et h ,t 1
The traditional modelh ,t  mct  Et ˆh ,t 1
f ,t  (mct*  st )  Et f ,t 1

t  [  mct  (1   )(mct*  st )]  Et ˆt 1

t  [  ,x x t   ,x *x t* ]  Et ˆt 1

t  [(   )x t   ,z z t ]  Et ˆt 1

Comments – empirical work
• Pass through evidence– More ambiguous than the authors suggest• Open economy AS curve / global slack
hypothesis– Evaluation using relative price term to capture thechannel seems the right way to goPrice and ULC
Manufacturing and non-farm business160

PPI - manufactured goods

140
120

Manufacturing ULC

100

Nonfarm business sector
implicit price deflator

80

Nonfarm business ULC

60
40
200
1950

1960

1970

1980

1990

2000

Suggestions for future research• Extend empirical work to look at economies
that have been dealing with globalization for alot longer than the US

Euro area comparison
135130125Euro area ULC - mfg.
Euro area ULC- total

120
115
110

Euro area Domestic PPI mfg.

105
100
95
90
1995

1998

2001

2004

2007

Suggestions for future research• Extend empirical work to look at economies that havebeen dealing with globalization for a lot longer thanthe US• Strategic interaction between firms is of a very limited
type– Imamoğlu (2010)• Competition on the basis of variety rather than price• Traded/nontraded, home/foreign sectoral breakdown– Importance of distribution sector (energy intensive) as adeterminant of short run inflation dynamics• Pricing strategy of the multinational multiproduct firm
– Baxter & Landry (2010) - IKEA