02576cas a2200253 a 4500 AALejournalIMF009646 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451868203 1018-5941 BD-DhAAL BD-DhAAL Mody, Ashoka. Can Domestic Policies Influence Inflation? / Ashoka Mody, Franziska Ohnsorge. Washington, D.C. : International Monetary Fund, 2007. 1 online resource (36 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students Globalization operates not only by reducing domestic pressures on inflation but also by reducing the scope of domestic authorities to influence the pace of inflation. First, as markets are integrated, the common, cross-border sources of inflation increase, reducing the extent of domestically-generated inflation. Based on a methodology identifying common time and sectoral trends, we find this to be especially the case in the countries of the eurozone, with their longer histories of product market integration. Second, even the domestically-generated component of inflation may be difficult to manipulate. Policies act, especially in the shortrun, through managing domestic demand. But the relationship between domestic demand (proxied by the output gap and unit labor cost growth) and inflation has been weak, constrained in part by trade openness. Moreover, the domestic component of inflation contains a country-specific international catch-up process that generates price equalization across countries. The evidence is that catch-up has accelerated with increasing market integration. Thus, for the eurozone economies, there may be limits on the use of fiscal and labor market policies to contain inflation. The new member states may not have policy leverage to meet the Maastricht inflation limit necessary for entering the eurozone. Casestudies show that fiscal consolidation needed to comply with the inflation criterion can be large and sustained only briefly to get under the Maastricht wire. Mode of access: Internet Ohnsorge, Franziska. IMF Working Papers; Working Paper ; No. 2007/257 Full text available on IMF http://elibrary.imf.org/view/journals/001/2007/257/001.2007.issue-257-en.xml IMF e-Library