Publication

This paper reviews the analytics of the effects of globalization on the Phillips curve and the utility-based objective function of the central bank. The authors demonstrate that in an endogenous-policy set up, when trade in goods is liberalized, financial openness increases and migration is allowed, policymakers become more aggressive on inflation and less responsive to the output gap. In other words, globalization induces the monetary authority, when guided in its policy by the welfare criterion of a representative household, to put more emphasis on the reduction of inflation variability. This happens at the expense of an increase in the output gap variability.