What has happened to U.S. Inflation? The Effect of Globalization on the Phillip's Curve
Department or Program
College of Arts and Sciences
Faculty Mentor #1
Since the end of the Great Recession, U.S. inflation dynamics have transformed. Inflation rates have remained low and stable, while unemployment has decreased, and the GDP growth rate has increased. Furthermore, there has been a lack of wage growth of wages in many sectors. These recent behaviors suggest a potential breakdown in the Phillips Curve; therefore, this paper aims to explain the behavior of the inflation dynamics by augmenting the Phillips Curve to incorporate globalization, such as openness to trade and FDI flows. Since the 1970s, world trade has increased from 26.7% in 1970 to 58.4% in 2018. During this time, the number of multinational corporations increased as well. These corporations can conduct vertical specialization to fragment the production process into small tasks, thus decreasing the price of inputs. By using OLS estimation, this paper finds little support for the hypothesis. Further research should focus on data in the sector or industry level. Additionally, further research should explore other possibilities that can influence inflation dynamics, such as workers’ bargaining power or the ‘sharing’ economy.