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Global Slack And Domestic Inflation Rates: A Structural Investigation For G-7 Countries

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Executive Summary

Recent papers have argued that one implication of globalization is that domestic inflation rates may have now become more a function of "Global", rather than domestic, economic conditions, as postulated by closed-economy Phillips curves. This paper aims to assess the empirical importance of global output in determining domestic inflation rates by estimating a structural model for a sample of G-7 economies. The model can capture the potential effects of global output fluctuations on both the aggregate supply and the aggregate demand relations in the economy and it is estimated using full-information Bayesian methods. The empirical results reveal a significant effect of global output on aggregate demand in most countries.

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