GLOBALIZATION AND US INFLATION

Estimates of the Phillips curve suggest that the low level of unemploy ment over the last few years should have produced a fairly significant increase in the rate of inflation, yet inflation has continued to fal l. Some take this occurrence as evidence that the NAIRU has declined. Others argue that special factors, such as recent movements of employe e health coverage to health maintenance organizations, have temporaril y masked the increase in inflation. Perhaps the most widely cited expl anation for the surprisingly good inflation performance of late concer ns the increasing sensitivity of the U.S. economy to foreign economic conditions; specifically, many have argued that since capacity utiliza tion abroad has been slack in recent years, U.S, inflation has remaine d mild. This study uses a variety of approaches to examine whether U.S . inflation depends on foreign, rather than domestic, capacity constra ints. The author shows that foreign capacity plays little, if any, rol e in the determination of U.S. inflation independent of any role it mi ght play in the determination of U.S. capacity utilization. He caution s that anyone who believes in a world where we no longer need worry ab out domestic capacity constraints will eventually be rudely awakened b y data that suggest otherwise. His results indicate that the Phillips curve, relating some measure of U.S, capacity utilization to U.S. infl ation, is alive, if ailing a bit, even as the world gets more integrat ed.