## Globalization and Global Disinflation by Kenneth Rogoff, Economic Counselor and Director, Research Department, IMF

_IMF News, August 29, 2003_

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## Bibliographic details
- Authors: Kenneth Rogoff
- Published: August 29, 2003

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### Overview and central argument
- Over the past ten years, global inflation has dropped "from 30% to 4%1."  
- Institutional improvements (central bank independence, anti-inflation-oriented appointees) matter, but Rogoff highlights increased competitiveness from globalization, deregulation, and reduced government roles as a major universal supporting factor for disinflation.
- Increased competitiveness:
  - Lowers monopoly pricing power and "quasi-rents."
  - Makes prices more flexible, reducing the real output gains from unanticipated inflation.
  - Strengthens central bank anti-inflation credibility and reduces trend inflation.

### Evidence on the near-universal fall in inflation
- Global and regional trends:
  - World CPI inflation (percent per annum) by periods:
    - 1980-84: World 14.1
    - 1985-89: World 15.5
    - 1990-94: World 30.4
    - 1995-99: World 8.4
    - 2000-03: World 4.1
    - 2000-04: World 3.9
    - 2003: World 3.9 (implied by table context)
  - Industrial economies: 1980-84: 8.7; 1985-89: 3.8; 1990-94: 2.0; 1995-99: 1.8; 2000-03: 1.9.
  - Developing countries: 1980-84: 31.4; 1985-89: 48.0; 1990-94: 53.2; 1995-99: 13.1; 2000-03: 5.7.
  - Latin America: 1980-84: 82.4; 1985-89: 185.9; 1990-94: 232.6; 1995-99: 17.2; 2000-03: 8.2.
  - Transition economies spike: 1990-94: 363.2; 1995-99: 53.9; 2000-03: 14.5.
- Country-level extremes and changes:
  - In the 1970s–1990s many high/hyperinflation episodes; examples of cumulative price increases since 1970 include Argentina (100 trillion times), Brazil (a quadrillion), Democratic Republic of the Congo (almost 10 quadrillion)2.
  - Of the IMF's 184 member states, only 11 are projected to have inflation over 20% in 2003; only 6 over 30% in 2003.
  - Using a 40% threshold: Myanmar (40%), Angola (over 75%) and Zimbabwe (over 400%) reach or exceed this level in 2003.
- Persistence and anchoring:
  - Augmented Dickey-Fuller unit root tests for 18 industrialized countries (monthly CPI 1960-2003):
    - For the full sample, cannot reject a unit root in inflation for any G-7 country.
    - Splitting sample around early 1980s: for 1981-2003 one can reject the unit root hypothesis for all G-7 countries at fairly high significance.
  - Table 3 p-values (selected):
    - United States: 1960.1-1981.12 = 0.4596; 1982.1-2003.4 = 0.0016.
    - Canada: 0.7684; 0.0167.
    - Japan: 0.0623; 0.0848.
    - France: 0.6953; 0.0033.
    - Germany: 0.3922; 0.0834.
    - Italy: 0.1756; 0.0180.
    - United Kingdom: 0.2656; 0.0176.
  - Emerging markets (Chile, Israel, South Africa) show evidence consistent with mean-reverting inflation in recent periods.
- Deflation concerns:
  - Deflation arguably threatens more countries today than very high inflation (over 40%) once CPI upward biases are accounted for7.

### Factors underpinning global disinflation
- Central bank institutional change:
  - Greater central bank independence and selection of anti-inflation-focused central bankers are important contributors.
  - Central bank governor turnover used as a proxy (Table 4, fraction per five years): developing countries turnover dropped from 0.211 (1970-1989) to 0.165 (1990-2002) among other regional changes; regional values vary (table excerpted).
  - Exchange rate regime analysis (Natural Classification) shows limited flexibility and freely floating currencies have the best inflation performance, but gaps across regimes are fairly narrow except for "freely falling."
- Fiscal policy:
  - Industrial countries averaged general government primary balances of 2.8% during 1990-2002 versus -0.1% for 1970-1989 (Table 5 summary).
  - Latin America averaged primary surpluses of 1.3% in 1990s versus -0.13% earlier; Africa deficits improved from -3.4% (pre-1990) to -1.6% (1990-2003).
  - Many countries show examples where rising deficits/debt coexisted with declining inflation (India, Japan).
  - Overall: fiscal policy broadly supportive but not a universal or decisive explanation for global disinflation.
- Productivity and technology:
  - The productivity explanation fits the U.S. late-1990s experience but fails as a universal cause (e.g., Europe saw falling inflation despite slowing productivity growth).
  - Productivity shocks tend to have temporary effects on inflation unless they affect the monopoly wedge k.
- Globalization, deregulation, and declining monopoly power:
  - Deregulation and globalization reduced monopoly rents and markups; IMF April 2003 WEO estimates markups about 0.4 on continental Europe vs. 0.15 for U.K./U.S.
  - Emerging Asia accounts for almost 20% of world trade (China alone 5%), exerting downward pressure on goods prices and affecting intermediate goods and substitution patterns.
  - Mechanisms through which globalization/deregulation reduce inflation:
    - Reduces the wedge (k) between monopolistic and competitive equilibria, lowering gains to unanticipated inflation.
    - Makes prices more flexible (lower μ), decreasing monetary policy potency on real output and increasing credibility of low-inflation policy.
    - Openness amplifies exchange-rate-mediated costs of inflationary shocks, tempering incentives to inflate.

### Simple mathematical formalization (stylized political-economy model)
- Central bank objective (simple static formulation):
  - (π - πe - k - z)2 + χ(π - π*)2
    - π = inflation set by central bank.
    - πe = private sector expected inflation.
    - k = wedge inversely related to monopoly power.
    - z = mean zero productivity shock.
    - π* = central bank preferred inflation (example given: 2.5%).
    - χ = relative weight on inflation stabilization.
  - Equilibrium under rational expectations:
    - πe = π* + k/χ
    - π = π* + (k - z)/χ
- Extension with price flexibility parameter μ:
  - Objective: [μ(π - πe) - k - z]2 + χ(π - π*)2
  - Equilibrium:
    - πe = π* + μ k/χ
    - π = π* + μ (k - z)/χ
  - Interpretation:
    - Smaller k (due to greater competition) and smaller μ (due to greater price flexibility) lower equilibrium and expected inflation.
    - Productivity shocks (z) have temporary effects; long-run trend requires changes in k or μ.
- Key conceptual takeaways:
  1. Trend inflation depends on central bank incentives to inflate, not merely transitory relative price shifts.
  2. Unexpected productivity shocks reduce inflation temporarily; deeper trend shifts arise from greater competition and price flexibility.

### Reduced conflict and other supportive factors
- Historical observation: war and civil conflict often drive very high inflation episodes; fewer large-economy conflicts in the 1990s likely supported disinflation.
- Commodity price trends: global commodity prices were on a steady downward trend for much of the period since the 1990s, aiding importing countries' price reductions.

### Risks of a return of inflation and policy implications
- Potential triggers for renewed inflation:
  - Reversals of globalization (historical precedent in early 20th century) or sustained trade frictions (e.g., extreme security measures disrupting supply chains).
  - Reversal of deregulation leading to rising monopoly power, increased price inflexibility, and renewed incentives for monetary authorities to inflate.
  - Fiscal pressures and demographic shocks (retirement bulges) that may push governments toward surprise de-indexing or tolerating inflationary policies.
  - Weakening of central bank independence or shifts in political acceptance of low inflation as a central objective.
- Policy implications and recommendations (implied across the analysis):
  - Preserve and strengthen central bank independence and commitment to low-inflation objectives.
  - Maintain openness, deregulation, and policies that sustain competitive markets to keep k and μ low.
  - Monitor fiscal sustainability, particularly in the face of demographic pressures, to avoid fiscal-driven inflation incentives.
  - Be vigilant about geopolitical or security developments that could materially reverse globalization and its disinflationary effects.

### Selected key statistics and tabulated highlights
- Global inflation averages:
  - World: 14.1 (1980-84); 15.5 (1985-89); 30.4 (1990-94); 8.4 (1995-99); 4.1 (2000-03); 3.9 (2000-04).
  - Industrial economies: 8.7 (1980-84); 3.8 (1985-89); 2.0 (1990-94); 1.8 (1995-99); 1.9 (2000-03).
  - Developing countries: 31.4 (1980-84); 48.0 (1985-89); 53.2 (1990-94); 13.1 (1995-99); 5.7 (2000-03).
- Regional 2000-03 inflation snapshots:
  - Africa: 11.8
  - Asia (developing): 2.3
  - Latin America: 8.2
  - Middle East: 15.3
  - Transition economies: 14.5
- Table 3 (ADF p-values for G7 split sample 1982.1-2003.4): United States 0.0016; Canada 0.0167; Japan 0.0848; France 0.0033; Germany 0.0834; Italy 0.0180; United Kingdom 0.0176.
- Central bank governor turnover (fraction per five years, selected):
  - Developing countries: 0.211 (1970-1989) -> 0.165 (1990-2002) (Table 4 noted regional variation).
- Fiscal stance (primary balances as percent of GDP, summary):
  - Industrial countries primary balances averaged 2.8% (1990-2002) versus -0.1% (1970-1989).

*Prepared for the Federal Reserve Bank of Kansas City conference on "Monetary Policy and Uncertainty: Adapting to a Changing Economy", Jackson Hole, WY, August 29, 2003 — Kenneth Rogoff, Economic Counselor and Director, Research Department, International Monetary Fund.*

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## References

- [Angola and the IMF](http://www.imf.org/external/country/AGO/index.htm)
- [Republic of Belarus and the IMF](http://www.imf.org/external/country/BLR/index.htm)
- [Canada and the IMF](http://www.imf.org/external/country/CAN/index.htm)
- [United Kingdom and the IMF](http://www.imf.org/external/country/GBR/index.htm)
- [Ireland and the IMF](http://www.imf.org/external/country/IRL/index.htm)
- [Japan and the IMF](http://www.imf.org/external/country/JPN/index.htm)
- [Myanmar and the IMF](http://www.imf.org/external/country/MMR/index.htm)
- [Republic of Türkiye and the IMF](http://www.imf.org/external/country/TUR/index.htm)
- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [Zimbabwe and the IMF](http://www.imf.org/external/country/ZWE/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [Kenneth S. Rogoff](https://www.imf.org/external/np/bio/eng/kr.htm)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp082903_