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For immediate release: April 6, 2007

Inflation's Links to Globalization Examined in New Dallas Fed Publication

DALLAS—The debut issue of the Federal Reserve Bank of Dallas' Staff Papers presents economic research that finds a new relationship between money, output and prices in a globalized economy.

In "Globalization, Aggregate Productivity, and Inflation," Senior Vice President and Chief Economist W. Michael Cox shows that both domestic and foreign economic growth matter in determining a country's inflation rate.

"When I was in graduate school, I was taught the traditional Equation of Exchange, which tells us a country's prices depend only on domestic money supply and domestic output," Cox said. "In that world, monetary policymakers could make decisions based solely on factors affecting domestic GDP growth. With this new model, I show that foreign output can be important to domestic prices, so policymakers can no longer afford to track inflation without regard to others' production. My new Equation of Exchange proves this is the case."

Cox isolates four factors that determine the extent to which external economies impact domestic inflation. Foreign growth matters more to inflation as country size declines, consumers shed their bias for home products, foreign goods become better substitutes for domestic ones and the more effectively labor displaced by imports can be deployed to other industries.

Staff Papers will examine diverse issues, including globalization and monetary policy, in greater depth than existing Dallas Fed publications. Each issue will contain a single article and be published as an occasional series.


Media contact:
James Hoard
Phone: (214) 922-5307