Abstract:
This paper highlights relative price adjustments taking place in the global economy as important sources of the lower levels of inflation rates observed in the recent decades. Using a markup model, it shows substantial effects from declines in wage costs and import prices relative to consumer prices. Out of the 5 percentage point decline in the inflation rates in eight OECD countries from 1970-1989 to 1990-2006, global shocks to two relative prices account for more than 1.5 percentage points, while a monetary policy shock accounts for another 1 percentage point.
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