The Impact of Globalization and Digitalization on the Phillips Curve
COVID-19 has affected globalization and digitalization in opposing ways. Globalization—a process of increasingly stronger integration with the world economy where firms can easily access foreign capital and sell a considerable share of their production abroad—has stalled. The global response to the pandemic and the associated collapse in demand have led to a significant drop in trade and financial linkages between countries. Digitalization—firms’ greater use of digital technologies, such as digitizing information and automating manual tasks—has increased. In particular, the physical distancing requirements related to COVID-19 have contributed to more online shopping, remote work and use of industrial robots.
We do not cover the developments of the COVID-19 period itself. We examine the impact of globalization and digitalization on the Phillips curve, which represents the sensitivity of inflation to economic activity. We use a sample of 18 advanced economies over two decades and industry-level data with a cross-country dimension. We first estimate Phillips curves for each decade by relating the growth rate of output prices to past inflation and an employment gap. We then assess the relative impact of globalization and digitalization on these Phillips curves. We measure globalization by increases in trade and financial integration and digitalization by the use of industrial robots as a share of a country’s population.
We find that globalization significantly reduces the sensitivity of inflation to domestic economic activity, while digitalization has the opposite effect. Some evidence shows that globalization decreases the level of inflation and digitalization increases it. Evidence for the impact of both trends on employment is not as conclusive. We find that the negative impact of globalization is less in industries with high growth in productivity and that the positive impact of digitalization is less in industries with high past investments in information technology.